FxWirePro: GBP/JPY call update - Short Leg of ‘Diagonal Put Ratio Back Spreads’ Delivers as Desired, Long Leg Likely to Function

GBPJPY has been attempting to spike from the lows of 130.699 to the current 146.635 levels. We have advocated put ratio back spreads of diagonal tenors a fortnight ago that comprised of shorts in 2w (1%) OTM put option (position seemed when the underlying spot goes either sideways or spikes mildly), simultaneously, longs in 2 lots of long in 2m ATM -0.49 vega put options.

As the underlying spot FX has spiked considerably as stated above, the writer of the short legs can rest assured with initial premiums received.

Well, on the flip side, the long side still intact and most likely to function.

The rationale for long legs in PRBS: The positively skewed IVs of 2m tenors signify the hedgers’ interests to bid OTM put strikes up to 142 levels (refer above nutshells evidencing IV skews). 

Accordingly, long positions in the diagonal put ratio back spread (PRBS)have been advocated on the hedging grounds. Both the speculators and hedgers who are interested in bearish risks are advised to capitalize on abrupt and momentary price rallies, simultaneously, bidding theta shorts in short run, on the flip side, 2m skews to optimally utilize vega longs.

The volatility impact: Please be noted that IVs of GBPJPY display the highest number among entire G10 FX universe (trending between 9.94% - 12.22%). Hence, vega long put is most likely to perform decently capitalizing on the rising mode of IVs.

The traders tend to perceive these trades as a bear strategy because it deploys more puts. But actually, it is a volatility strategy.

Hence, entering the position when implied volatility is high and anticipating for the inevitable adjustment is a wise thing, regardless of the direction of price movement. Based on volatility and time decay, the strategy is a “price neutral” approach to options and one that makes a lot of sense.

Given the condition that IVs keep rising and if GBPJPY spot keeps dipping, then the vega longs would add handsome option’s premiums to the price of such puts correspondingly, these derivatives instruments target further bearishness of this pair.

Currency Strength Index: FxWirePro's hourly GBP spot index is flashing 140 (which is bullish), while hourly JPY spot index was at -50 (bearish) while articulating (at 10:00 GMT).

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