FxWirePro: Mounting Sterling Hedging Sentiments Ahead of EU Summit – Bid 1m/3m GBP/USD OTC and Deploy Diagonal Put Spreads

The long-awaited October EU summit is now less than a week away and optimism that the UK and EU can secure a withdrawal agreement has continued to build since the end of the UK political conference season. The sense that the end-game to the two-year Brexit saga is nearing has lifted GBP by 1.5%. The index stands just below the April 2018 high, which itself was the best level since the ill-fated referendum. Indeed, the index is rather delicately poised equidistant between its pre-referendum level and the post-referendum trough (8.5% from either).

OTC outlook:

Positively skewed implied volatilities still signal bearish hedging sentiments. To substantiate this downside risk sentiment, negative risk reversals indicate mounting bearish sentiments.

We reckon that the sterling should not suffer like before in the near terms, but, one should not disregard Fed’s hiking cycle and Brexit negotiation on the other hand. The market has always ignored the fact that all the current BoE interest rate moves are due to a favourable result of the Brexit process.

Both the speculators and hedgers of GBPUSD are advised to capitalize on the prevailing price rallies for bearish risks and bidding theta shorts in short run (1m IVs) and 3m risks reversals to optimally utilize delta longs.

On hedging grounds, fresh delta longs for long-term hedging comprising of ATM instruments and OTM shorts in short-term would optimize the strategy.

So, the execution of hedging positions goes this way:

Short 1m (1%) OTM put option (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, initiate longs in 3m ATM -0.49 delta put options. A move towards the ATM territory increases the Vega, Gamma and Delta which boosts premium.

Thereby, the above positions address both upswings that are prevailing in short run and bearish risks in long run by delta longs.

The political and economic backdrop remains supportive of sterling’s underperformance. We continue to be short but take partial profits by unwinding the GBPUSD expression of the trade since this is currently in the money but has only less than a week to expiry and is close to the strike. 

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards -77 levels (which is bearish), hourly USD spot index has bearish index is creeping at -42, while articulating (at 12:10 GMT). For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex