GBP/USD has seen some big intraday ranges and is lacking direction, an environment that favours simple FX options.
A vanilla FX option with a cash hedge is designed to capture spot volatility, regardless of direction, but would also benefit from a sudden break out of recent ranges.
The owners of an option will pay a premium for a set strike and expiry at which to buy or sell GBP/USD.
They would also take an opposing view in the underlying spot market, with a cash hedge.
By constantly adjusting that cash hedge to keep the overall position neutral as GBP/USD moves, they hope to bank enough spot pips to offset the premium and return some profit.
Shorter-dated expiry options tend to benefit most from spot volatility, so it's no surprise to see their premiums elevated.
Implied volatility gauges future volatility and determines the premium - one-week expiry GBP/USD implied volatility trades the mid 8's and is below one-week historic/actual volatility at 9.0, highlighting the potential value.
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GBP/USD volatility measures Click here