The current price of EURGBP is trading almost 4 and half months lows at 0.8369 levels after U.K. services activity hits 10-month high in November. The report states, UK service PMIs increased to 55.2 last month from a reading of 54.5 in October which is more than anticipated (forecasts were at 54.2), bolstering optimism over the health of the British economy as the sector makes up approximately 80% of the gross domestic product, industry data showed on Monday.

In a report, market research group Markit said the seasonally adjusted UK service PMIs prints the upbeat numbers of 55.2 last month from a reading of 54.5 in October.

Hedging Framework:

Elsewhere, the EURGBP’s implied volatility is perceived to be rising a tad below 10.5% among the major currency counterparts (3m ATM contracts spiking well above 10.34%). As you can probably make out the negatively skewed IVs that signify the short term interests of upside risks, while the bearish risks are signified by 1m tenors.

While the delta risk reversals have been neutral to indicate hedgers have been cautious but previous sentiments of bullish risks are completely faded away, now that turns into bearish sentiments.

Well, capitalizing on fundamental updates, IV skews, and risk reversal indications, one can execute the option strategies as stated follows:

Snap rallies and buy this 1w1m IV skews and neutral risk reversals that keep FX exposures on tight hedge with reduced costs, it is advisable to construct option strips strategy so as to mitigate the risks on either side using the diagonal expiries.

Hence, to execute this strategy, go long in 2 lots of 1m ATM -0.49 delta puts and simultaneously, add long in 1 lot of ATM +0.52 delta calls of 2w expiry.

In the bottom line, Should the foreign trader reckons that the underlying volatility will likely remain significantly higher in the medium term, then this strategy is advisable, he may even wish to hold on to the long term straddle to profit from any large price movement that may occur.