GBP/AUD hedging perspectives for downside risks
In the GBP Brexit basket over the past month. We added a short position in GBP/AUD to reduce the overall defensive nature of most of the basket of trades.
The pair has been very well reacting to our whim fancy as it dropped down almost 13.56% to the current 1.8675 levels after we traced bearish patterns such as gravestone doji and hanging man patterns and we maintain our medium term targets at 1.83 levels.
Since OTC markets seem to be considerably volatile with extremely bearish environment, IVs for 1M contracts are at around 11.44%).
Well, good news for put option holders contemplating the prevailing bearish environment but more number of longs in ATM delta puts would ensure the reasonable probabilities in underlying exposures.
To factor in the weakness in this pair as we could see reasonable IVs even in next 1-3m expiries, we recommend capitalizing more on bearish signals and the IV factor in long term by employing OTM longs matching with ATM longs to construct back spreads that likely to fetch positive cash flows.
Please be sure that a large move in the underlying should be allocated with longer tenor (targets set at 1.83 levels) and can be withstood without losing any money. This should be of greater concern than doing the spread for reducing debit.
So, here goes the strategy this way, At spot ref: 1.8675, go long in 2 lots 1M ATM -0.50 delta puts, long in 2M (1%) OTM -0.35 delta put, and simultaneously short 2W (1%) ITM shorts, the spread is to be executed in the ratio of 3:1with net delta at around -0.70
The delta of the strategy is at 71%, which means there is more likelihood of long options expiring ITM on expiration (have a look on sensitivity table), these instruments are the major contributors in the strategy as you can refer %change in premiums and their probabilities to hit the OTM strikes.
Since you are certain about the research and bearish for sure, so why hesitating in execution, we preferred loading up with 1 lot of extra long of slightly OTM strikes in our Put Ratio Back Spread (glance through the probability sequence and %change in premiums, they are crazily exponential).
Please refer below link for IVs and sensitivity table:
www.econotimes.com/F...ownside-risks-183057
The pair has been very well reacting to our whim fancy as it dropped down almost 13.56% to the current 1.8675 levels after we traced bearish patterns such as gravestone doji and hanging man patterns and we maintain our medium term targets at 1.83 levels.
Since OTC markets seem to be considerably volatile with extremely bearish environment, IVs for 1M contracts are at around 11.44%).
Well, good news for put option holders contemplating the prevailing bearish environment but more number of longs in ATM delta puts would ensure the reasonable probabilities in underlying exposures.
To factor in the weakness in this pair as we could see reasonable IVs even in next 1-3m expiries, we recommend capitalizing more on bearish signals and the IV factor in long term by employing OTM longs matching with ATM longs to construct back spreads that likely to fetch positive cash flows.
Please be sure that a large move in the underlying should be allocated with longer tenor (targets set at 1.83 levels) and can be withstood without losing any money. This should be of greater concern than doing the spread for reducing debit.
So, here goes the strategy this way, At spot ref: 1.8675, go long in 2 lots 1M ATM -0.50 delta puts, long in 2M (1%) OTM -0.35 delta put, and simultaneously short 2W (1%) ITM shorts, the spread is to be executed in the ratio of 3:1with net delta at around -0.70
The delta of the strategy is at 71%, which means there is more likelihood of long options expiring ITM on expiration (have a look on sensitivity table), these instruments are the major contributors in the strategy as you can refer %change in premiums and their probabilities to hit the OTM strikes.
Since you are certain about the research and bearish for sure, so why hesitating in execution, we preferred loading up with 1 lot of extra long of slightly OTM strikes in our Put Ratio Back Spread (glance through the probability sequence and %change in premiums, they are crazily exponential).
Please refer below link for IVs and sensitivity table:
www.econotimes.com/F...ownside-risks-183057
