FxWirePro: Bullish and bearish scenarios of Sterling - Rosy time for GBP OTM put writers, bid 1w/3m OTC to strategize hedging

Bearish GBP scenarios: 

1) No Brexit (revocation of Article 50 and/or a second referendum, 

2) The resolution to the US/China trade conflict and a 10-15% bounce in equities, 

3) The renewed SNB intervention. SNB intervention (weekly sight depos), SNB policy).

Bullish GBP scenarios: 

1) A deeper downturn in European growth and cancellation of ECB hikes, 

2) The extended US government shutdown, US growth falls towards 1%, risk of Fed easing, 

3) The escalation in the US/China trade conflict, 

4) No deal Brexit. 

OTC outlook:

Positive bids are observed in the GBPUSD risk reversals of short-term tenors (1w). While positively skewed implied volatilities of 3m tenors still signal bearish hedging sentiments. To substantiate this downside risk sentiment, 3m risk reversals have also been bearish.

We reckon that the sterling should not suffer like before in the rear run, but, one should not disregard the Fed’s hiking cycle on the other hand. 

Most importantly, as you could observe 1w (1%) OTM puts seem to be exorbitantly priced. they are trading more than 36% with their NPV is at 320, whereas IVs of 1w tenor is just shy above 12.60%. Hence, there exists the disparity between OTM puts and IVs that offers the opportunity for the put writers. 

Both the speculators and hedgers of GBPUSD are advised to capitalize on the prevailing 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 short run and bearish risks in long run by delta longs.

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards 86 levels (which is bullish), and hourly USD spot index trending at 118 (bullish) while articulating (at 11:41 GMT). 

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