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FxWirePro: Cable’s PoC and VA indicates balanced market – ATM straddle shorts to trade on shrinking IVs and skews and uphold short hedges

Although GBPUSD sees some mild rally today, the trend is currently drifting in sideways at 1.2723 levels.

Market profile on 4H: 

Point of control (PoC) is at 1.2725, 

Unfair highs – 1.2727

Unfair lows – 1.2711

Value area (VA) – 1.2727 – 1.2720

21-SMA – 1.2710

7-DMA – 1.2720

RSI – Faded at 58 – 60 levels, which is shrinkage of strength in the previous upswing.

The minor trend of the pair has failed at around the stiff resistance of 1.2749 levels quite a few times in the recent past, the prevailing interim upswings are likely to restrain below 7 & 21-DMA and the stiff resistance of levels.

If the market is balanced, it has already found the point of control which is the fair price, and that’s where it will have an equal number of options holders and writers. It is most likely to generate range bound day as the prevailing price revolves around the PoC.

Cable prices are finding some two-way price action around 1.2720 in the minor trend and at 1.2900 in major trend with divergence in the intra-day studies, we highlighted now unwinding. 

If the market is imbalanced, it will look in for the fair price, either selling or buying would be predominant and the big trend day is likely. But here, the case is inverse. Most importantly, 1m skews are well balanced on either side, both bulls and bears are positioned with shrinking implied volatilities. Hence, we reckon that this is conducive for options writers.

On a broader perspective, although the long-term analysis remains little constructive, the major downtrend has now resumed (refer monthly plotting), slumps below EMAs are on the verge of retracing 61.8% Fibonacci levels as both leading and lagging indicators on this timeframe are also in tandem with the selling sentiments & bearish EMA crossover.

Trading tips: Contemplating above technical and OTC market rationale, if the sideway sentiments sustain, then, the laggards are most likely to remain in the same range for some more time. Thus, at spot reference: 1.2727 levels (keep tolerance about 20 pips on either side), accordingly, straddle short option strategy is advocated on an intraday trading basis, using strikes at 1.2747 and 1.2707 levels.

The trading strategy likely to fetch certain yields if the forward FX prices remain between these strikes on the expiration. (Caution: strictly advised for day trading, not meant for positional purpose).

Short hedge: Alternatively, on hedging grounds ahead of US Fed that is scheduled for the next week, long-term investors are advised to stay short in futures contracts of mid-month tenors. The writers of the futures contract are expected to maintain margins in order to open and maintain a short futures position.

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards 98 levels (which is bullish), while hourly USD spot index was at 2 (absolutely neutral) while articulating (at 06:49 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex

By Niranjan Patil
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