FxWirePro: GBP/JPY OTC outlook and derivatives hedging scenarios

GBPJPY has been extremely weaker at levels of 147. Technically, ever since the occurrence of shootings star and bearish engulfing pattern candles which are bearish in nature, we’ve been anchoring the bearish stance of is backed by both leading and lagging oscillators, RSI and stochastic confirms the intensified bearish momentum, while moving averages and MACD are in conformity to the downtrend.

For now, one can think of shorts in this pair only for the selling sentiment that is still prevailing on the breach below wedge baseline. For more readings, refer our technical section.

OTC outlook and derivatives hedging strategies:

Please be noted that the positively skewed IVs of GBPJPY of 2m tenors signify the hedgers’ interests in OTM put strikes (upto 143 levels) and isn’t this a luring factor for a shrewd bear. While 2w/2m IVs of ATM contracts are trending above 11.64% and 10.64% respectively that are the suitable combinations for diagonal put ratio spreads.

Because the higher IVs with well-adjusted positive skewness signify the hedgers’ interest for both OTM call/put strikes. In usual circumstances, long option position needs higher IVs for significant change in vega. Hence, we capitalize on buzzing IVs in 3m tenor for long leg and improve odds on options below strategy.

The aggressive volatility investors want to capture GBP should consider buying ATM put instruments and/or being long of the smile convexity, against ATM volatility. Thus, ATM strikes are perceived to be more conducive than the OTMs.

Further GBPJPY upswings and/or weakness suggest building directional strategies as given below and volatility patterns at the same time.

1) In order to mitigate the mounting downside risks and keep them on the check, we advocate adding longs in 2 lots of ATM -0.49 delta puts of 2m tenor while writing 1 lot of 2% OTM put of 2w tenor.

Contemplating IV skewness and ongoing technical trend, we foresee the value of ATM options would likely rise significantly as the IVs seem to be favoring long legs of ATM strikes.

2) Dubious and risks averse traders, we advocate buying GBPJPY – USDJPY 1Y ATM straddle spread with equal JPY vega.

3) Alternatively, on hedging grounds, we advocate shorting futures contracts of near-month tenors as the underlying spot FX likely to target southwards 144 levels in the near run.

Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.

Currency Strength Index: FxWirePro's hourly GBP spot index has turned into -77 (which is bearish ahead of manufacturing PMI, net lending and M4 money supply data prints), while hourly JPY spot index was at shy above 103 (highly bullish) while articulating (at 07:13 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex

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