Hedging strategy:
3-Way Options straddle versus Call
Spread ratio: (Long 1: Long 1: Short 1)
The execution: Initiate long in GBPAUD 1M at the money -0.49 delta put, long 1M at the money +0.51 delta call and simultaneously, short theta in 1w (1%) out of the money call with positive theta or closer to zero.Theta is positive; time decay is bad for a buyer, but good for an option writer.
Rationale: Please be noted that 3m skews are stretched on either side, ATM options have more likelihood to expire in the money and also be noted that the 1w (1%) OTM calls of this pair is trading at exorbitant prices.
OTM calls costs more 80% than NPV
While 1w IVs are just shy above 8.8%
Hence, we reckon that writing such exorbitant calls are beneficial as there exists the disparity between IVs and option pricing.
Hence, we encourage vega longs and short thetas in the non-directional trending pair but slightly favors bearish strategy as the vega signifies the sensitivity of an option’s value owing to a shift in volatility. It is usually expressed as the change in premium value per 1% change in implied volatility.
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