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FxWirePro: Sterling Looks Superior Over Aussie - Bid 2m GBP/AUD IV Skews To Optimize Hedging Strategy

The Sterling has stabilised a little overnight, after extending last week’s reversal yesterday. The commodity currencies remain the underperformers, particularly the AUD, with the minutes of the November RBA meeting, released overnight, continuing to highlight an easing bias. The hope perhaps being that a trade deal between the US and China would raise business confidence. As such, trade headlines are likely to continue to cause some volatility in the markets, especially as we have little key data until Friday’s PMI updates from the major nations. 

GBPAUD has been edging higher amid short-term corrections in the major uptrend as you could observe in the monthly plotting.

We advocate 3-Way Diagonal Options Spread as 1st hedging option.

Ratio: (Long 1: Long 1: Short 1) at spot reference: 1.9010 levels.

The execution: Initiate long in GBPAUD 2m at the money delta call, long 2M at the money delta put and simultaneously, Short theta in 2w (1.5%) out of the money put with positive theta or closer to zero.

Rationale: Contemplating IV skews, short-term and long-term trends that are well balanced on either side, we could expect both minor price dips in short-term and major uptrend remains intact.

The positively skewed 2m IVs are stretched towards both OTM calls and OTM puts, we reckon that the Delta instruments are conducive to monitor directional risk so as to be aware that how much of option’s value would increase or diminish as the underlying market moves as this option tool measures the value of an option as the underlying spot FX moves. Well, a higher (absolute) Delta value is desirable on long leg in the above stated strategy. Whereas, the Theta is positive on short leg; as the time decay is good for an option writer (that’s why we’ve chosen narrowed expiry).

Hence, we advocate the above options strategy with cost-effectiveness that could hedge regardless of the swings on either side. 

Alternatively, hedging no.2, we advocated initiating shorts in GBPAUD futures contracts of October’19 delivery and simultaneously, longs in futures of December’19 delivery. 

Thereby, the foreign traders, who are dubious about puzzling swings, can directionally position in their FX exposures. Shorts leg has expired now, we wish to uphold the long leg of December deliveries. Courtesy: Llyods & Sentry

By Niranjan Patil
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