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The central bank of Australia is scheduled to be announcing its monetary policy on April 04th which is likely to stay pat, even if the RBA does not deliver easings in 2H17, three hikes from the Fed will still leave minimal carry support for AUD, which is particularly important given its vulnerability to a turn in China’s momentum or adverse developments in global trade.
On the flip side, GBP is eyeing on UK growth that slows below 1% as inflation checks a spend-thrift consumer and business investment fades pre-Brexit,2) Outright capital repatriation from slower moving long-term investors including central banks, 3) Initial Brexit talks flounder on the size of the UK's exit-bill.
Consequently, in the prevailing puzzled environment, you could observe that the momentary bulls of GBPAUD struggle to break and sustain above stiff resistance of 1.64 levels, currently trading in non-directly to signal some bearish pressures. We advocate below hedging strategy with cost effectiveness that could hedge regardless of the swings on either side.
Hedging Framework:
3-Way Options straddle versus Call
Spread ratio: (Long 1: Long 1: Short 1)
The execution: Initiate long in GBPAUD 3M at the money vega put, long 3M at the money vega call and simultaneously, Short theta in 1m (1.5%) out of the money call with positive theta or closer to zero. Theta is positive; time decay is bad for a buyer, but good for an option writer.
Rationale: As you could observe the vega of long leg (buy) call option position is 190.17 USD and it implies that if IV increases or decreases by 1%, the option’s premium would have an impact in an increase or decrease by 190.17 USD, respectively. The Vega of a short (sell) option position is negative and an increasing IV is bad.
Hence, we encourage vega longs and short thetas in the non-directional trending pair but slightly favors bearish strategy as the vega signifies the sensitivity of an option’s value owing to a shift in volatility. It is usually expressed as the change in premium value per 1% change in implied volatility.
