FxWirePro: GBP/JPY bearish trend in tandem with skews and forward rates – IVs conducive to execute ‘Put Ratio Back Spreads’

GBPJPY has been dipping from the recent peaks of 146.649 levels to the current 144.944 levels while articulating (at 08:24 GMT). We’ve explicitly highlighted the further bearish potential of this pair in the days to come in the technical section, please follow below weblink for more reading on the same:

https://www.econotimes.com/FxWirePro-GBP-JPY-swings-oscillate-in-sloping-channel-in-minor-trend-and-majort-trend-breaches-rising-channel-support-1391501

Fundamentally, as we continue to foresee the trade apprehensions rachet up, the British pound likely to prolong bearish streaks amid minor spikes against the Japanese yen in a typical “risk off” move. These bearish sentiments are factored-in OTC markets.

OTC outlook and Hedging Strategy:

Please be noted that the positively skewed IVs of 2m tenors signify the hedgers’ interests to bid OTM put strikes upto 141 levels (refer above nutshell evidencing IV skews). As you could observe GBPJPY forward rates across different tenors (refer above 1st and 2nd charts), these derivatives instruments indicate bearish targets of this pair.

Why Diagonal Put Ratio Back Spreads: Let’s just glance through IV nutshell, the implied vols of 2w are decreasing from current levels, whereas, 2m tenors are in rising trend. This could be an opportunity to construct put ratio spreads with diagonal tenors.

Because the option pricing depends on future volatility, and it is quite impossible for anyone to ascertain accurate future volatility. Nevertheless, it is quite possible to calculate the marketplace’s expected future volatility using the option’s price itself which is known as implied volatility (IV). Options with a higher IV cost more. Well, this is quite intuitive owing to the higher likelihood of the underlying GBPJPY market ‘swinging’ in your favour. If IV increases and you are holding an option, this is good. On the contrary, if you have short on option, it is not desirable. The option writer likes IV to drop so the premium falls, thereby, the underlying price remains stagnant and he can pocket the initial premium received.

Let's have a glance through the short leg which appears to be overpriced than NPV.

Accordingly, put ratio back spreads a couple of days ago were advocated, wherein short leg is functioning as the underlying spot FX keeps spiking, we would like to uphold the same strategy on hedging grounds.

Both the speculators and hedgers who are interested in bearish risks are advised to capitalize on any abrupt momentary price rallies and bidding theta shorts in short run, on the flip side, 2m skews to optimally utilize Vega longs.

The execution: Short 2w (1%) OTM put option (position seems good even if the underlying spot goes either sideways or spike mildly), simultaneously, go long in 2 lots of vega long in 2m ATM -0.49 delta put options. A move towards the ATM territory increases the Vega, Gamma and Delta which boosts premium.

The fresh Vega longs for long-term hedging, more number of longs comprising of ATM instruments and ITM shorts in short-term would optimize the strategy.

Thereby, the above positions address both upswings in short run and bearish risks in long run by vega longs.

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards -54 levels (which is bearish), while hourly JPY spot index was at 124 (bullish) while articulating (at 09:54 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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