Currency Derivatives Insights: (GBPUSD)
Since a sharp sell call is traced out by slow stochastic (14,3,1) as %D line crossover exactly above 80 levels on weekly charts, this bearish view is also supported with 14 day RSI.
With a hedging perspective of GBP FX exposure the below strategy is advocated.
Arrest downside risks of these pairs hedging through deploying option strategy: Put Ratio back spread
Add 2 lots of longs on 7D (-1%) Out-Of-The-Money -0.16 delta puts (strike at 1.5483) with negative 27.98 theta and short 7D (+0.5%) In-The-Money put (strike at 1.5719) with positive theta value, in a ratio of 2:1. The combined spread should have delta at 0.35 with -15.92 theta value.
Expect the exchange rate of this pair to tumble at least 200+ pips in the medium term basis to make a larger downside moves.
Net credits from short side can finance 2 lots of OTM put options. However, huge margin is required to short ITM puts. The higher strike short puts finances the purchase of the greater number of long puts and the position is entered for no cost or a net credit.
The exchange rate of GBPUSD has to make substantial move on the downside for the gains in long puts to overcome the losses in the short puts as the maximum loss is at the long strike.
