FxWirePro: GBP/AUD 3-Way Options Straddle Cersus Call Ahead of BoE

Despite a May-Day holiday-shortened week ahead, key for the week ahead include the FOMC decision on 2 May (while no changes to the policy setting is expected, nevertheless any indications of a dovish inclination given the upside surprise in 1Q19 growth momentum, especially since the futures market is still pricing in a rate cut by year-end, will be keenly monitored), China’s PMI and Eurozone’s 1Q GDP growth tomorrow, BOE governor Carney is also speaking. BOE policy meeting on Thursday (likely to be static, albeit possibly with Saunders as a potential dissenter, but also watch the updated economic forecasts and Carney’s comments).

Well, all these macros standpoints could propel GBPAUD either on upswings or downswings but with slightly biased southwards.

Hedging Framework:

3-Way Options straddle versus Call
Spread ratio: (Long 1: Long 1: Short 1)

The execution: Initiate long in GBPAUD 2M at the money delta put, long 2M at the money delta call and simultaneously, Short theta in 1m (1.5%) out of the money call with positive theta or closer to zero.

Rationale: Contemplating 3m IV skews that are well balanced on either side (positively skews on both OTM calls and OTM puts), we reckon that the Delta instruments are conducive to monitor directional risk so as to be aware that how much of option’s value would increase or diminish as the underlying market moves as this option tool measures the value of an option as the underlying spot FX moves. Well, higher (absolute) Delta value is desirable on the long leg in the above-stated strategy. Whereas, the Theta is positive on the short leg; as the time decay is good for an option writer (that’s why we’ve chosen narrowed expiry).

We reiterate, in the prevailing puzzled environment you could observe that the momentary bulls of GBPAUD have currently been trading in non-directionally but with some bearish pressures. Hence, we advocate the above hedging strategy with the cost-effectiveness that could hedge regardless of the swings on either side. Courtesy: Sentry

Let’s glance at the FxWirePro’s Currency Strength Index: FxWirePro's hourly AUD spot index is flashing 84 (which is bullish), while hourly GBP spot index was at shy above 108 (highly bullish) at 07:17 GMT.

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