FxWirePro: Uphold GBP/USD ‘debit put spread’ amid monetary policy season

The big picture for sterling remains generally constructive, however, the setback against the USD can be extended slightly. The political deadlock in the Brexit drama however persists, so that deeper countertrend declines can’t be excluded yet. The latter just received stronger evidence via the break below 1.2916 (minor 76.4 %) in Cable, which increased the risk of extending lower to 1.2772 levels.

OTC Updates: Negative bids for the GBPUSD risk reversals across all tenors remain intact. While positively skewed implied volatilities of 3m tenors have still stretched towards OTM put strikes. To substantiate this downside risk sentiment, risk reversals have also been signaling bearish hedging sentiments.

We reckon that the sterling should not suffer like before, but, one should not disregard the Brexit settlement risks on the other hand. The market has always ignored the fact that all the current BoE interest rate moves are due to a favorable result of the Brexit process.

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

Strategic Options Recommendations: 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 the short run and bearish risks in the long run by delta longs. Courtesy: Sentrix & Saxo

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards 81 levels (which is bullish), and hourly USD spot index has bearish index is creeping at -132 (bearish) while articulating (at 08:17 GMT). 

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