FxWirePro: Are GBP IVs justifiable? Futures alternatives for options

The recent dip in GBP volatilities on the options markets (see above charts) do not really make total sense. 

Has the uncertainty concerning Brexit really fallen in the eyes of the market since the vote in the House of Commons was postponed? Of course, it was clear that Prime Minister Theresa May would lose the vote on her withdrawal agreement. 

The Federal Reserve interest rate decision is the key set-piece on today’s market agenda. Recent statements from FOMC members have been interpreted as ‘dovish’ in nature, and understandably so, with Chair Powell suggesting that rate rises next year are likely to be more data dependent. A 25bps increase in the Fed funds rate is widely expected this evening. 

On the other hand, Bank of England is also scheduled for its monetary policy which is most likely to maintain status quo. Today’s UK November inflation release likely to show a decline in both ‘headline’ and ‘core’ inflation. Inflation has fallen back closer to the BoE’s 2% target, with the waning impact of sterling’s post-referendum depreciation and recent decline in oil prices putting downward pressure on the year-on-year rates. 

Short hedges through futures contracts: If you glance at the pricing of 1w ATM GBPUSD puts, it seems to be overpriced as there exists disparity between IVs and NPV.  These options are overpriced 24% more than NPV.

Alternatively, on hedging grounds, shorting futures contracts of mid-month tenors were advocated, now we wish to uphold the same position as the underlying spot FX likely to slide southwards 1.2424 levels in the near terms.

Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: Ore, Saxo

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards -3 levels (which is absolutely neutral), and hourly USD spot index has bearish index is creeping at -70 (bearish) while articulating (at 11:23 GMT). 

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