FxWirePro: GBP/AUD strategic hedging perspectives - Wise to write exorbitant calls in 3-way straddles

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.

Currency Strength Index: FxWirePro's hourly GBP spot index has turned into 112 (which is highly bullish), while hourly AUD spot index was at shy above -136 (highly bearish) while articulating (at 12:08 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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