FxWirePro: GBP/USD shift in RRs and 1m skews indicate ‘diagonal options straps’ as operative hedging vehicle

Let’s glance at GBPUSD sensitivity tool, the positive shift in risks reversals that indicate the bullish risks in underlying spot FX prices in near-term.

While positively skewed IVs of 1m tenors are well balanced that signifies the hedging interests in both bearish and bullish risks, as a result, OTM puts/call strikes likely to expiring in-the-money.

But bearish risks in longer tenors remain intact as the negative risk reversals of longer tenors indicate hedgers still bid for downside risks. ATM IVs are still stuck between 7.7%-8.47% ranges for 1-3M tenors.

Hence, in order to arrest both upside risk that is lingering in short-term trend and major declining trend, we recommend diagonal option strap strategy that favors underlying spot’s upside bias in short run and mitigates bearish risks in the medium term.

So, we recommend building the FX portfolio exposed to this pair with longs positions in 2 lots of 1M ATM 0.51 delta calls and 1 lot of ATM -0.49 delta puts of 3m expiries, these options positions construct smart hedging at net debit.

The strategy is likely to mitigate both bullish as well as bearish risks irrespective of spot moves. However, on speculative grounds, more potential is foreseen on the upside. Please note positive cashflows whether underlying spot keeps flying or dipping.

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards 105 levels (which is bullish). Hourly USD spot index was at shy above -118 (bearish) while articulating (at 11:54 GMT).

For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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