Almanac spreads of EUR/GBP to hedge downside risks

Lots of bearish stuffs are boiling on this pair. The formation of descending triangle on EURGBP pair is seen on weekly chart.

We watch out watch for a move below triangle support at 0.7114 that will drag the pair to further slumps in weeks to come.

It is suggesting that downward momentum is building. Once this breakdown occurs, we like to enter into short positions and aggressively push the price of the currency lower.

In addition to that a long tail hanging man followed by a long real body bearish engulfing pattern candle occurred at 0.728 and 0.7105 levels respectively which is a strong bearish signal.

Currency Option basket:
Hedge downside risks of EUR/GBP with Short Put Almanac Spreads:
Hedging Exposure = 100,000

We recommend buying either ATM or ITM (strike price = 0.719) put option of this month contract and simultaneously selling ATM or OTM put option of next month or far month contract.

ATM Put (this month contract) for long available at GBP 476.12.

ATM Put (next month contract) for short available at GBP 1014.87.

NPV = 408.86

The strategy most commonly involves puts with the same strike (horizontal spread) but can also be done with different strikes (diagonal spread).

Short side should have a more distant expiration.

The returns from this position depend on the momentum of near and far month put options.

If the underlying currency holds steady, the strategy suffers from time decay. If the underlying currency moves sharply up or down, both options will move toward their intrinsic value or zero, thus narrowing the difference between their values.