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Sep 22 - 07:55 AM

GBP/USD - COMMENT-GBP/USD Volatility Makes For A Winning Trade

By Richard Pace  —  Sep 22 - 07:05 AM

Intraday swings in GBP/USD have rewarded those playing the volatility angle via short-dated expiry FX options, and may continue to do so as broader risk gyrations, Covid infection, and Brexit news remain at the fore.

Implied volatility, which measures the future actual volatility risk of GBP/USD and determines option premium, is higher over recent sessions - reflecting demand and increased actual volatility.

An option holder wants actual volatility, regardless of direction, to be higher than the implied volatility paid for the option, while any increase in implied volatility will also increase the option's value.
If volatility starts to fall, they can book any profits, or cut losses, by selling the option before it expires.

To monetise the volatility, the option will trade in conjunction with a delta hedge - an opposing cash market view, which is constantly adjusted as GBP/USD moves, to neutralise the options strike risk.

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1-week and 1-month GBP/USD implied volatility Click here

Source:
Refinitiv IFR Research/Market Commentary

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