FxWirePro: Short strangle on GBP/USD’s range bound trend

Technical Preview:

It has been observed and kept urging that there would be range bounded swings on this pair where upper band is 1.58 which is maintaining as a resistance point while 1.5175 as support from last couple of months (From April).

In between, the pair has also made an intermediary channel at 1.5475 levels where it has acted as resistance and support several times in the past (see yellow colored circled areas).

Hence, we would foresee GBP on weaker side on the back of today's construction PMI which has flashed at 58.8 although well in line with forecasts but reduced from previous 59.9. As a result of above technical and fundamental reasoning we see pair to head southwards 1.5345 levels 1st and even upto lower channel.

Hedging Framework: Short strangle

Vols and risk reversal: based on order flow analysis, the low implied volatility is also experienced from last couple of days and would likely to perceive the lower side for next 2-3 months or so as shown in the nutshell.

While delta risk reversal indicates bearish hedging activities have been piling up and it would remain the same for 3-6 months or so. As a result ATM puts are priced in costlier.

Rationale: Since the range bounded market is evidenced and the continuation is suggested by technicals and lower implied volatility at 9.06% to substantiate this reasoning, we recommend taking the advantage of these benefits through below option trading strategy.

As the risk appetite varies from different investors to different traders, we've customized our formulation of strategies for such varied circumstances.

Short 2.5% OTM call and short one more -1.5% OTM put of the same maturity for net credit. The OTM strikes should be selected so as to meet out the above specified bands on both the sides. Select the strikes so as to match the above mentioned price bands.

This strategy derives limited returns with unlimited risk that is taken when the options trader thinks that the GBPUSD would experience little volatility in the near term.

Maximum returns for the short strangle occurs when the exchange price of GBPUSD on expiration date is trading between the strike prices of the options sold. At this price, both options expire worthless and the options trader gets to keep the entire initial credit taken as profit.