FxWirePro: Aggressive GBP/JPY volatility investors to prefer cheaper ATM strikes over exorbitantly priced OTMs ahead of BoE and BoJ monetary policies

The Japanese yen has been falling modestly possibly due in part to expectations of BoJ that is scheduled for mid of this month (20th Dec). Sterling is sitting close to recent highs ahead of next week’s BoE’s monetary policy announcement (14th Dec) and Brexit: no deal yesterday, goal to reach compromise by mid-December, the status of Irish border divides DUP/ Conservative government, GBP bulls cave in, cable at 1.3440, 2y/10y IRS steepens to 51bp.

Please be noted that the positively skewed IVs of GBPJPY of 2w/1m tenors signify the hedgers’ interests in OTM put strikes. While IVs of these tenors are spiking above 11.25% & 9.60% which is highest among G7 Fx bloc.

The higher IVs with well-adjusted positive skewness signify the hedgers’ interest for both OTM call/put strikes. In usual circumstances, long option position needs higher IVs for significant change in vega. Hence, we capitalize on buzzing IVs and improve odds on options below strategy.

With this interpretation, one can judge whether the options with a higher IV cost more. This is intuitive due to the higher likelihood of the market ‘swinging’ in your favour. If IV increases and you are holding an option, this is good.

Thus, we advocate weighing up above aspects as we eye on loading up with fresh vega longs for long term hedging, more number of longs comprising of ATM instruments and deep OTM call shorts with narrowed tenors would optimize the strategy.

The aggressive volatility investors want to capture GBP should consider buying ATM put instruments and/or being long of the smile convexity, against ATM volatility. Please glance through sensitivity table for the ATM and OTM pricings, ATM puts are trading at 10.66% and OTM puts are at 30.6%. Thus, ATM strikes are perceived to be more conducive than the OTMs.

Further GBPJPY upswings and/or weakness suggest building a directional strategies and volatility patterns at the same time.

In order to mitigate downside risks and keep them on the check, we advocate adding longs in 2 lots of ATM -0.49 delta puts of 1m tenor while writing 1 lot of 2% OTM put of 1w tenor.

Contemplating IV skewness and ongoing technical trend, we foresee the value of ATM options would likely rise significantly as the IVs seem to be favoring long legs of ATM strikes.

Currency Strength Index: Ahead of the announcement of the UK retail sales numbers and BoJ’s monetary policies, FxWirePro's hourly GBP spot index is flashing at -143 levels (highly bearish), while hourly JPY spot index was at shy above 20 (neutral) while articulating at 07:41 GMT, these indies values are also in sync with our above technical rationale. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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