What is weighing on the pound's slumps is that the Brexit pressures, these pressures keep mounting ahead of BoE policy whcih is likely to stand pat in tomorrow's meeting but the chances for lower interest rates in 2016 has grown up to 23%, an increase from the February survey that had placed the odds at only 10%.
While the Federal Reserve on the other hand, may be disappointed by yesterday’s softer consumer spending report, the release should not alter their plans to raise interest rates in 2016 but in today's meeting should not bring in any changes due to economic conditions are yet to improve.
Since the GBPUSD’s implied volatility is perceived to be rising among the major currency counterparts (1W ATM contracts at around 11.7%) and expected to remain at average of 11.5% over the period of time as shown in the nutshell.
Delta risk reversal indicates hedgers are ready to pay high premiums on OTM puts in longer time horizon.
So relying on this IV and risk reversal indications, one can execute the calendar straddle versus call as follows:
It is quite simple as we go shorts in 2W ATM calls as the trend seems to favour dollar in short run and longs in ATM puts using far month expiries while adding longs in mid month ATM calls.
Shorts in ATM calls likely to fetch in positive cash flows from the rapid time decay of the near term options sold..
We used diagonal tenors to monitor these risk reversals' indications deploying multiple legs strategy, it is very essential to decide on which follow-up action to take when the near-term contracts expire.
This is exclusively dependant on the revised outlook of the GBP/USD at that time ahead of Fed’s and BoE's rate policy decisions but for spot FX portfolio would be safeguarded with the least or reduced hedging cost.
In bottom line, Should the foreign trader reckons that the underlying volatility will likely remain significantly higher in medium term, then this strategy is advisable, he may even wish to hold on to the long term straddle to profit from any large price movement that may occur.
However, if the options trader is unsure of what to expect of the underlying, it may be best to take profit (or loss) and move on to evaluate other trading possibilities.
The material has been provided by InstaForex Company – www.instaforex.com