FxWirePro: GBP/JPY Scenarios Analysis, OTC Updates and Options Strategy

Bearish GBPJPY Scenarios: 

1) A no-deal Brexit (GBP down between 10-20%). 

2) PM May resigns and is replaced by a harder-Brexiteer following the defeat of a Brexit motion in parliament, opening the way to no-deal Brexit.

3) The US starts vehemently criticizing Japan’s trade surplus against the US.

Bullish GBPJPY Scenarios:

1) The Withdrawal Agreement is eventually approved (GBP +3-5%). 

2) Article 50 deadline is extended (GBP+2-3%). 

3) A second referendum (GBP +5%). 

4) Article 50 is revoked, unilaterally by parliament or following a second referendum (GBP up 10%+).

5) JPY selling flows related to FDI get a stronger momentum.

6) Crude oil prices rally significantly which results in the sharp deteriorating trade balance of Japan.

OTC outlook and Hedging Strategy: Please be noted that IVs of GBPJPY display the highest number among entire G10 FX universe (trending between 13.21% - 10.99%). Hence, vega long put is most likely to perform decently capitalizing on the rising mode of IVs.

While the positively skewed IVs of 2m tenors signify the hedgers’ interests to bid OTM put strikes up to 138 levels (refer above nutshells evidencing IV skews). 

Accordingly, diagonal put ratio back spreads (PRBS) are advocated on the hedging grounds. Both the speculators and hedgers who are interested in bearish risks are advised to capitalize on abrupt and momentary price rallies, simultaneously, bidding theta shorts in short run, on the flip side, 2m skews to optimally utilize vega longs.

The execution: Capitalizing on any minor upswings, we advocate shorting 2w (1%) OTM put option (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, go long in 2 lots of long in 2m ATM -0.49 vega put options. 

The rationale for PRBS: Well, the traders tend to perceive these trades as a bear strategy, because it deploys more puts. But actually, it is a volatility strategy.

Hence, entering the position when implied volatility is high and anticipating for the inevitable adjustment is a wise thing, regardless of the direction of price movement. Based on volatility and time decay, the strategy is a “price neutral” approach to options and one that makes a lot of sense.

Given the condition that, IVs keep rising and if GBPJPY spot keeps dipping, then the vega longs would add handsome option’s premiums to the price of such puts correspondingly, these derivatives instruments target further bearishness of this pair. Courtesy: Sentrix & JPM

Currency Strength Index: FxWirePro's hourly GBP spot index is flashing -95 (which is bearish), while hourly JPY spot index was at 23 (mildly bullish) while articulating (at 08:41 GMT).

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