FxWirePro: GBP/JPY theta shorts more imminent in PRBS to sync with OTC indications

OTC updates: The OTC indications of GBPJPY are also substantiating the above-stated bearish stances if you glance at the positively skewed IVs of GBPJPY of 2m tenors signify the mounting hedgers’ interests in OTM put strikes (bids upto 142 levels) and isn’t this a luring factor for a shrewd bear. While 2w/2m IVs of ATM contracts are trending between 8.98% - 10.25% that are the suitable combinations for diagonal ratio spreads structures.

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 2m 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.

Options Strategies: The lingering concerns on any further GBPJPY weakness suggest customizing directional strategies as given below and volatility patterns at the same time.

In order to mitigate the mounting downside risks and keep them on the check, we advocate adding longs in 2 lots of (1%) OTM -0.49 delta puts of 2m tenor, while writing 1 lot of 1% ITM put of 1m tenor. Payoff structure of this strategy has been exponential as the underlying spot FX keeps dipping.

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

Writing 1m (1%) in the money put with positive theta snaps decisive rallies, short legs on ITM puts would go worthless considering time decay advantage. Simultaneously, we uphold 2 lots of longs in 3m 1% OTM puts, the structure could be constructed either at net debit.

It was explicitly stated that “Theta shorts are recommended in this strategy because, Theta is not a constant, it changes as the underlying market moves and time passes. Theta is the sensitivity of an option’s value to the passage of time. It is usually expressed as the change in value per one day’s passage of time.”

Currency Strength Index: FxWirePro's hourly GBP spot index is flashing -10 (which is neutral), while hourly JPY spot index was at -85 (bearish), while articulating (at 08:32 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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