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Aug 25 - 05:55 AM

GBP/USD - COMMENT-This GBP/USD Environment Favours A Simple Strategy

By Richard Pace  —  Aug 25 - 04:15 AM

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

Source:
Refinitiv IFR Research/Market Commentary

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