Canadian CPI (MoM) and retail sales data are scheduled to be announced shortly, and forecasted be at 0.4% -0.8% respectively.
The GDP data for both UK & Canada and Canadian retail sales data are also lined up for next week, both side, growth was at 0.6% on MoM basis.
In just last five months, GBPCAD has declined from the highs of 2.0949 to the current 1.8162 levels, (i.e. almost 13.3%).
Last week, in UK the BoE maintained an unchanged interest rate at 0.50%, all MPC members unanimously voted for this decision.
As a result, ATM IVs seem to be quite poised to factor this data event in this pair as we could see moderate IVs of 1W and 1M tenors, 9.73% for 1w expiries and 9.99% for 1m tenors.
Technically, despite the handsome recoveries in GBPCAD from last two days, nothing much has changed to the major trend which is vigorously bearish, the current prices have still remained well below 21DMA.
In last five months, GBPCAD has shown declines from the highs of 2.0949 to the current 1.8185 levels, (i.e. almost 13.19% and a fresh 1-year lows).
Thus, we recommend capitalizing on the sustainable IV factor by employing ITM short puts as there central bank's decision was in line with market's expectations, upcoming data events may bring in little volatilities (no drastic change is expected OTC markets) and matching this with ATM longs to construct short term back spreads that is likely to fetch positive cash flows as per the indications by sensitivity table.
So, keeping all these attributes in mind, here goes the strategy, go long in 1M 2 lots of ATM -0.50 delta put, and in 2M (0.5%) OTM -0.36 delta puts, while shorting 1 lot of ATM put and (0.5%) OTM put with both expiries of 1 week.
When trying to assess how a spread may perform, look at the spreads of deeper in-the-money options for an indication of relative option prices. (For a demonstrated purpose we’ve used 1% ITM instruments, in real times use longer expiries on ATM longs.
Idea is to get more cushion from the shorting premiums as there is no deviation from central bank's decision, subsequently, the slight upward or sideway swings would derive the positive cashflows through the initial receipts of shorts which could be utilized for reducing hedging cost.
While on the other hand, more weights on longs would likely take care of prevailing major bear trend, in other words, as the spot price keep dipping (as per sensitivity table) these long positions gain more. Ultimately, any potential declines are most likely to be arrested.
The material has been provided by InstaForex Company – www.instaforex.com