FxWirePro: UK tepid growth boosts up cable’s bearish sentiments – butterfly spreads on lower IVs

Slowing UK growth momentum should be confirmed in next week's final read of Q3 GDP, supporting our bearish sterling view in the context of impending fiscal tightening and EU referendum risk.

We would be exhilarated by a break in GBPUSD below nearby targets in the 1.4855 area. Greater technical targets are towards 1.4565, the year-to-date lows.

Hedging framework:

Since the cable's implied volatility is still perceived to be the least within next one-month time frame from other major G7 pairs (at around 6-7%), so here comes a multiple leg of option strategy for regular traders of this currency cross when there is little IV. A total of 4 legs are involved in the butterfly spreads strategy and a net debit is required to establish the position.

So strategy goes this way, writing 2 lots of (-1%) at the money -0.49 puts and buying (1%) out the money calls and buying another (1%) in the money call for a net debit. In live scenarios use the longer maturities on longs and shorter maturities on shorts.