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Oct 08 - 08:55 AM

GBP/USD - COMMENT-Frustrated By GBP/USD Volatility? Try This Option

By Richard Pace  —  Oct 08 - 06:50 AM

Brexit headline-related GBP volatility is frustrating spot traders, as the pound whipsaws in both directions amid EU/UK trade negotiations, but there's an option strategy that thrives in this environment.

Known as long gamma, it allows those holding it to capture FX moves, regardless of direction, and more volatility equals more profit potential.

The trade involves holding a short-dated-expiry option (they generate the most gamma) that gives the holder the right to buy or sell GBP/USD at a fixed level (strike) and maturity.
It's like an insurance policy, for which they will pay a premium.

They will also hold an opposing view in the cash market, so they effectively have no exposure - a neutral position.
As the FX rate moves, this cash hedge is constantly adjusted to keep the position neutral, which in turn should capture spot moves and offset the premium cost.

The frequency of hedging plays a part, and often is more likely to reward in the current environment.
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GBP=D3 hourly chart Click here

GBP/USD 1-week implied volatility Click here

Source:
Refinitiv IFR Research/Market Commentary

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