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FxWirePro: Snippets of GBP/AUD fundamentals and hedging perspectives via 3-way straddles versus OTM call

Today’s data releases are the second tier and are unlikely to have much impact on markets. In the UK, the October Halifax house price index has produced upbeat numbers at 0.3% versus consensus at 0.2% (the latest update on trends in the housing market). The index has pointed to a slowdown in house price inflation over the past few years, but Q3 did see a modest pickup.

On the flip side, Australia got a softer start to Q1 GDP accounting, Australia’s nominal trade balance increased by A$ 8.9 billion in Q1.

China eases policy and commodities rebound;

The Australian housing market reaccelerates.

RBA left the cash rate unchanged at 1.5%, with post-meeting comments by Governor Lowe highlighting that the outlook for non-mining business has improved, but concerns remain around household consumption. Wage growth remains slow, while debt levels remain high.

Well, all these macros standpoints could propel GBPAUD either side but more downswings potential.

Consequently, in the prevailing puzzled environment, you could observe that the momentary bulls of GBPAUD struggle to break and sustain above stiff resistance of 1.7650 levels, currently trading in non-directly to signal some bearish pressures. We advocate below hedging strategy with the 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 2M at the money -0.49 delta put, long 2M at the money +0.51 delta call and simultaneously, short theta in 2w (1%) 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: The Vega of a short (sell) option position is negative and an increasing IV is bad. Please be noted that the 1m IVs are just shy above 7.75%, whereas ATM calls of this tenor seem to have been overpriced at 12% more than NPV, hence, we foresee writing such exorbitant calls are beneficial as there exists the disparity between IVs and option pricing.

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.

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November 22 00:30 UTC Released

AUConstruction Work Done*

Actual

15.7 %

Forecast

Previous

15.7 %

November 21 13:00 UTC Released

USExp Soybean Inspected

Actual

2131.354 M

Forecast

Previous

2087.458 M

November 22 07:00 UTC 9292m

TRConsumer Confidence*

Actual

Forecast

Previous

67.3 %

November 22 08:00 UTC 152152m

USRedbook YY

Actual

Forecast

Previous

2.3 %

November 22 08:00 UTC 152152m

ZACore Inflation MM*

Actual

Forecast

0.2 %

Previous

0.4 %

November 22 08:00 UTC 152152m

USMBA Mortgage Applications

Actual

Forecast

Previous

3.1 %

November 22 12:00 UTC 392392m

USMBA Mortgage Applications

Actual

Forecast

Previous

3.1 %

November 22 12:00 UTC 392392m

USJobless Claims 4-Wk Avg

Actual

Forecast

Previous

237.75 k

November 22 13:30 UTC 482482m

USInitial Jobless Claims

Actual

Forecast

240 k

Previous

249 k

November 22 13:30 UTC 482482m

USContinued Jobless Claims

Actual

Forecast

1.882 Mln

Previous

1.860 Mln

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