FxWirePro: GBP/JPY IV skewness proposes competitive advantage for both OTM call/put writers in short term hedging strategies

Please be noted that the positively skewed IVs of GBPJPY of 1m tenors signify the hedgers’ interests in OTM put strikes. Whereas IVs of these tenors are just shy above 9.67% which is the highest among G7 currency space, while higher IVs with positively skewed IVs signify the hedgers’ interest for both OTM call/put strikes.

The trend of this underlying spot has been in consolidation phase but drifting in a non-directional way.

In usual circumstances, long option position needs higher IVs for significant change in vega. Hence, we capitalize on buzzing IVs and improve odds on options below strategy.

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 favor. 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 call shorts in short term 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 trend in the consolidation phase, we foresee the opportunity in writing of OTM options in any of the hedging strategy in order to reduce the cost of long options.

Currency Strength Index: Ahead of BoE’s monetary policies, FxWirePro's hourly GBP spot index is flashing at 97 levels (highly bullish), while hourly JPY spot index was at shy above -104 (highly bearish) at 07:50 GMT. For more details on the index, please refer below weblink:

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

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