FxWirePro: Ideal time to snap GBP/JPY deceptive rallies and write OTM options – Buzzing ‘Delta Instruments’ in ‘Put Ratio Back Spreads’

Yesterday, the Sterling dropped vigorously after the announcement that the UK parliament would be prorogued in the second week of September until the 14th October. GBPJPY is one such pair that showed renewed bearish traction amid lingering geopolitical turmoil. The pair has shown interim rallies from the lows of 126.541 to the recent highs of 130.698 levels. Thereafter, slid back below 130 region, currently, hovering at 129.700 (i.e. 7-DMAs, refer above price chart).

The announcement gives parliamentary opponents of a ‘no-deal’ Brexit only a small window to block such an exit on 31st October. Market will now look for opposition parties’ reactions when parliament returns next week. Let’s now quickly glance through GBPJPY OTC outlook and options strategy.

OTC outlook and Options Strategy: Amid huge turbulence of Brexit surface, most importantly, note that IVs of this pair display the highest number among entire G7 FX universe.

Please also be noted that the positively skewed IVs of 3m tenors signify the hedgers’ interests to bid OTM put strikes up to 120 levels (refer above nutshell evidencing IV skews). 

Accordingly, 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 interim price rallies that seem momentary and bidding theta shorts in short run, on the flip side, 3m skews encourage delta longs. Both put together can optimally utilize prevailing condition and set up an ideal hedge.

The execution: Capitalizing on any minor upswings , we advocate shorting 1m (1%) OTM put option (position seems good even if the underlying spot goes either sideways or slides mildly), simultaneously, go long in 2 lots of delta long in 2m ATM -0.49 delta put options (spot reference: 129.600 levels). 

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.

Every underlying move towards the ITM territory increases the Vega, Gamma, and Delta which boosts premium. As you could observe spot GBPJPY keeps dipping, these delta longs would become in the money, while these derivatives instruments target further bearishness of this pair. While the recent rallies seem to be deceptive that could be conducive for the OTM put options writers. Courtesy: Sentrix & JPM