Sterling’s hedging activity tops the OTC volume index - Trade EUR/GBP ATM vol along time curve via diagonal call ratio back spread

OTC indications: At EURGBP spot reference levels: 0.8905 levels, please be noted that the positively skewed IVs of 6m tenors signify the hedgers’ interests to bid OTM call strikes upto 0.94 levels (refer above nutshell evidencing IV skews). 

The highest number of trades of standard GBP option contracts are taking place in the over-the-counter (OTC) forex options market. The OTC volume index highlights volume traded in the past 24-hours versus a rolling one month daily average, as per the sources of Saxo Bank. The index is a barometer of volume on liquid contracts for different crosses. Values over 100 indicate volume higher than the average, values under 100 indicate volume lower than the average.

While the risk reversal (RRs) of EURGBP is also signalling bullish risks in longer-term tenors, bullish neutral RRs across all tenors.

Please also be noted that the implied volatilities of these combinations of tenors (1m and 6m), shrinking IVs in 1m tenor that are supportive for call option writers and IVs are on rising mode in 3m-6m tenors that are conducive for options holders.

Hedging Strategy of EURGBP: Contemplating above OTC indications, we advocate diagonal credit call spread on hedging grounds that addresses both short-term downswings and long-term upside risks.

This option strategy to keep the potential bullish price risk caused out of fundamental events on check.

Keeping above OTC factors in mind, it is advisable to initiate long in 3M ATM 0.51 delta call, simultaneously, writing 1m (1%) ITM call with positive theta and delta closer to zero (both sides use European style options), this credit call spread option trading strategy is recommended when the underlying spot FX price is anticipated to drop moderately in the near term and spikes up in long term.

The return is limited by ITM shorts. No matter how far the market moves below that point, the profit would be the maximum to the extent of initial premiums received. 

Currency Strength Index: FxWirePro's hourly EUR spot index is at shy above -34 levels (which is bearish), while hourly GBP spot index is edging higher at 42 levels (bullish) while articulating (at 11:18 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex