FxWirePro: GBP/JPY 2w/2m IV slopes to lure Theta shorts and Vega longs in optionality structures as Sterling bulls gain traction momentarily on hawkish BoE

Following on from last week’s ‘hawkish’ comments from Bank of England policymakers in the recent past, we now expect a UK rate hike of 0.25% to be announced after the next Monetary Policy Committee meeting on November 2nd. The minutes of the September meeting and subsequent comments by MPC members suggest that there is now widespread support on the committee for a rise.

The Japanese yen fell modestly possibly due in part to expectations of a snap general election.

In addition, please be noted that the positively skewed IVs of GBPJPY of 2m tenors signify the hedgers’ interests in the bid for OTM put strikes at 145. While IVs of these tenors are spiking above 10.11% which is highest among G7 currency space, 2w IVs are on lower side comparatively.

In usual circumstances, long option position needs higher IVs for significant change in Vega as the shift in this Option Greek is highly sensitive towards implied vols. Hence, we capitalize on buzzing IVs and improve odds on options below strategy.

On the flip side, using shrinking IVs of shorter tenors with bearish neutral delta risk reversal is interpreted as an opportunity for writing OTM puts or theta shorts in short run on time decay advantage.

With this interpretation, one can judge whether the options with a higher IV cost more. This is intuitive due to the higher likelihood of the market ‘swinging’ in your favour. If IV increases and you are holding an option, this is good.

Thus, we advocate weighing up above aspects as we eye on loading up with fresh vega longs for long-term hedging, more number of longs comprising of ATM instruments and OTM shorts with narrowed tenors would optimize the strategy.

The aggressive volatility investors want to capture GBP should consider buying ATM put instruments and/or being long of the smile convexity, against ATM volatility.

Further GBPJPY upswings and/or abrupt weakness suggest building a directional strategies and volatility patterns at the same time.

Contemplating IV skewness and ongoing technical uptrend in the consolidation phase, we foresee the value of OTM options would likely rise significantly as the IVs seem to be favoring long legs of ATM strikes.

Currency Strength Index: FxWirePro's hourly GBP spot index is flashing at -41 levels (bearish), while hourly JPY spot index was at shy above -46 (bearish) at 05:46 GMT, these indies values are also in sync with our above technical rationale. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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