FxWirePro: Place butterfly spreads ahead of GBP/USD’s interim upswings

Rationale: It is only dollar that is giving up its gains owing to yesterday's poor retail sales and PPI numbers. As there are no significant data releases that could propel GBP side for next week until UK retail sales figures are scheduled on next Thursday, hence we think the current upswings remain again in the range of 1.5711 and 1.5175.

As anticipated, BoE's official bank rate is kept unchanged at 0.5% for more than six years. It is far longer, and in near future GBPUSD may likely to experience low volatility as shown in the above nutshell. You can make out from the nutshell showing IV; GBPUSD is to have the least IV among G7 currency pool.

The trader can implement this strategy using put options now with similar maturities to deal with lower implied volatility. Construct a butterfly spreads using puts as delta risk reversal has shifted market sentiments towards slightly downwards. One should use this when expectation the exchange price of the GBPUSD to change very little or within a very tight trading range over the life of the option contracts.

Since the cable's implied volatility is still perceived to be the least within next one month time frame from other major G7 pairs (at around 6-7%), so here comes a multiple leg of option strategy for regular traders of this currency cross when there is little IV. A total of 4 legs are involved in the butterfly spreads strategy and a net debit is required to establish the position.

So strategy goes this way, writing 2 lots of (-1%) at the money -0.49 puts and buying (1%) out the money calls and buying another (1%) in the money call for a net debit. In live scenarios use the longer maturities on longs and shorter maturities on shorts.

The highest return for this strategy is attained when the GBPUSD price remains unchanged or nearby ATM strikes at expiration. At this price, only the highest striking put expires in the money. On the flip side, maximum loss would be limited to the extent of initial debit paid to enter the trade plus brokerages.