6 May 2015
Trading GBP/USD using options into UK political uncertainty – ORE
FXStreet (Barcelona) - With GBP/USD volatility climbing higher, Merav Brenner of ORE, suggests an options based strategy to trade the pair into the UK political uncertainty and US NFP ahead in the week.
Key Quotes
“GBP/USD options are currently indicating high volatility in the coming week, above 18%, and two week options are priced with volatility around 15%. The spreads between the volatilities from one week up to four weeks from now, are gradually tightening. This means that the expected volatility for this week is high and investors believe that once the UK election results are out, the UK's future economic picture will be much clearer.”
“The near-term, high volatility is also factoring in the NFP data. Either way, the volatility curve makes sense as currently investor uncertainty is focused on this week.”
“A position that can be interesting for those wanting to speculate on these coming events is to sell a short-term option and buy a long-term option with the same strike rate. This strategy is called a “time spread” since you are selling and buying options on the same asset with different durations.”
“Note that with time spreads, when the short-term option expires you remain with an open position on the longer term option. You will profit if the spreads between the volatilities in the options tighten, i.e., if the short-term volatility falls and the long-term volatility rises. The vice versa can also be traded if you believe that the spread between the different term options will widen, i.e. the short-term volatility rises and the long-term volatility falls.”
Key Quotes
“GBP/USD options are currently indicating high volatility in the coming week, above 18%, and two week options are priced with volatility around 15%. The spreads between the volatilities from one week up to four weeks from now, are gradually tightening. This means that the expected volatility for this week is high and investors believe that once the UK election results are out, the UK's future economic picture will be much clearer.”
“The near-term, high volatility is also factoring in the NFP data. Either way, the volatility curve makes sense as currently investor uncertainty is focused on this week.”
“A position that can be interesting for those wanting to speculate on these coming events is to sell a short-term option and buy a long-term option with the same strike rate. This strategy is called a “time spread” since you are selling and buying options on the same asset with different durations.”
“Note that with time spreads, when the short-term option expires you remain with an open position on the longer term option. You will profit if the spreads between the volatilities in the options tighten, i.e., if the short-term volatility falls and the long-term volatility rises. The vice versa can also be traded if you believe that the spread between the different term options will widen, i.e. the short-term volatility rises and the long-term volatility falls.”