FxWirePro: GBP/AUD iron condors for trading on tepid IVs and bearish neutral RRs

FX markets were a sideshow to the plunge in US equities and spike in equity volatility this past week. But should this equity market volatility persist there will be the greater risk of near-term FX de-risking. This leaves long EUR & GBP and short USD, CHF, & JPY positioning most vulnerable near-term. But medium-term, even if higher volatility and anxiety over the growth/inflation mix becomes more permanent, it would only marginally impact our medium-term FX views.

Are you dubious on sterling’s trend..? Having hit its weakest point against the euro since last October’s ‘flash crash’, the pound is now consolidating around 1.7734 against the Aussie dollar and has extended the pullback through 1.3990 support against US dollar, with next support lies at 1.3930 for GBPUSD and 1.7698 for GBPAUD. A break here would suggest last week’s spike high is a lower high within a more structured decline.

This should then lead to a break from previous 1.7660 reactions lows, opening more important 1.7575 support for GBPAUD.

However, both constituent currencies are struggling for direction, caught between the conflicting considerations of heightened political uncertainties and potentially tighter monetary conditions. The most pressing matters of late have been politically orientated. The stalling Brexit negotiations have weighed on GBP in particular.

Please be noted that the GBPAUD's implied volatility is perceived to be on a lower side (well below 9% in 1m tenor and below 10% across all tenors) along with skews suggesting neutral risk sentiments, accordingly we construct a multiple legs of option strategy for regular traders of this currency cross when there is little IV.

GBPAUD's lower IVs with bearish neutral risk sentiments could be interpreted as the option writer’s opportunity in short run. Thus, exploiting on lower IVs we eye on shorting calls with shorter expiries which would lock in certain yields by initial receipts of premiums.

A total of 4 legs are involved in the condor options strategy and a net debit is required to establish the position.

Using options expiring on the same expiration month, the options trader can create an iron condor as shown in the above diagram by shorting a lower strike OTM put and buying an even lower strike out-of-the-money put, similarly shorting a higher strike OTM call and buying another even higher strike out-of-the-money call.

This results in a net credit to put on the trade.

Currency Strength Index: FxWirePro's hourly GBP spot index has turned into -6 (which is mildly bullish), while hourly AUD spot index was at shy above 103 (bullish) while articulating (at 11:05 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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