FxWirePro: Butterfly spreads best suitable on GBP/USD lower IVs

Observe the cable's implied volatility, it is still likely to perceive the least volatility within next 1w-1m time frame from other major G7 pairs (at around 6-7%), and observe the price range on technical charts as well.

As a result, a strategy with multiple leg of options has stroked our mind for regular traders of this currency cross when there is lower IV.

A total of 4 legs are involved in the butterfly spreads strategy and a net debit is required to establish the position.

The trader can implement this strategy using put options now with similar maturities to deal with lower implied volatility.

Construct a butterfly spreads using puts as delta risk reversal has shifted market sentiments towards slightly downwards.

One should use this when expectation the exchange price of the GBPUSD to change very little or within a very tight trading range over the life of the option contracts.

So strategy goes this way, writing 2 lots of at the money puts and buying (-1%) out the money -0.15 delta put and buying another (1%) in the money -0.82 delta put option.

In live scenarios use the longer maturities on longs and shorter maturities on shorts.

The highest return for this strategy is attained when the GBPUSD price remains unchanged or nearby ATM strikes at expiration. At this price, only the highest striking put expires in the money.

On the flip side, maximum loss would be limited to the extent of initial debit paid to enter the trade plus brokerages.