Major downtrend of GBPJPY is still robust, since 10th October we saw whipsaws pattern, the pair hasn’t moved anywhere beyond 128.498 northwards nor even 125.289 on southwards. But for now, the current prices jump above DMAs with bullish crossover after whipsaws to hit fresh 8-weeks highs of 134.324 levels.

1m IVs clearly signifies that the OTC market participants’ interests still towards bearish effects, as a result, thus, it is needless to say, selling expensive GBP puts should prove profitable amid such a mild updraft in GBPJPY spot.

Contemplating risk reversal adjustments, we foresee the opportunities in writing overpriced ITM puts coupled with adding long positions in ATM delta puts long-term tenors.

As shown in the diagram, one can add 2w (1%) ITM shorts while going long in ATM -0.49 delta puts with preferably longer tenors comparing to the short leg. Please be noted that the tenors chosen in the diagram are just for the demonstration purpose only, use narrow expiries on the short side.

So it is advisable to initiate Diagonal Credit Put Spread (DCPS) in order to tackle both short-term upswings and major downtrend.

For the ease of understanding, we’ve just considered this option strategy with shorts in 1W (1%) ITM put with positive theta or closer to zero while buying 1M (0.5%) OTM put option; the strategy could be executed at net credit.

You could also observe positive cash inflows are certain from the nutshell showing payoff structure as long as the underlying spot remains well below 135.268. But please note that the tenors shown in the diagram are just for demonstration purpose only, use accurate tenors as stated above.

Theta on short side measures time decay in your options premium value per day which means the premiums on short leg today is worth more than over every time break even if the underlying spot doesn’t move anywhere, all else been equal, the option premium should be waning out. This would be the case even when underlying spot never goes up but remains in sideways.

Option sellers can reap the benefits of a high Theta near expiry by selling short-dated ATM options with the expectation of little to almost no market movement.

Thereafter, the major trend prolongs to evidence further slumps, narrowed OTM longs would mitigate downside risks on the other hand as the holder of such option would be having right sell at predetermined strikes.