FxWirePro: EUR/GBP diagonal credit call spread to tackle both minor and major swings

Eurozone Industrial Production data reflected much stronger than expected output for Aug (+1.0% M/M versus +0.5% expected). Euro is little changed from this time yesterday but appears to be heading for a modest gain on the week to consolidate losses seen over the past couple of weeks. Bund/BTP spreads are steady around 300bps, helping underpin the EUR as Italian budget concerns stabilize. Sovereign ratings action in response to the Italian government’s fiscal stance remains a risk, however.

EURGBP support at 0.8725 held, but the rebound is muted, while momentum is quickly unwinding from oversold. A move through 0.8790/0.8805 would suggest a broader correction back towards 0.8840 key pivot can be seen. While under, the potential is for a test of 0.8680-0.8620 key pivotal support within the broader 0.8300-0.9100 range. A subsequent break there would be a significant change in dynamic, and suggest we are moving into a lower range around 0.8550.

Long term, we still cannot rule out a retest of the 2008 highs at 0.9802. However, the risks of that decrease the longer we remain within this medium-term range under 0.9300-0.9710. A decline through 0.8250 key support would negate upside risks and suggest a move back to 0.8000 and then 0.7500.

Hence, 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 the both fundamental 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. Courtesy: Lloyds

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -14 levels (which is neutral), while hourly GBP spot index was at -15 (neutral) while articulating (at 14:05 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex