Forex Investment and Currency Trading

As of London open, with recent USD bearishness, the relatively affordable levels of GBP vols combined with spot approaching 2.0000 presents an opportunity to seek topside gains in GBP if spot breaks through this psychological level.

Current 200-day MA comes in around 1.9961, a close above this level should signal increased bullishness on GBPUSD. Currently GBP risk reversals favor GBP puts but with increased USD bearishness expressed in the option market, this should be viewed as an opportunity to cheapen a GBP bullish strategy.

A suggestion on the vanilla side to compliment this USD bearishness is to buy some 1-month 25 delta GBP Calls (8.05 vol mid which gets its 0.36 % GBP off a 1.9995 spot rate). These are trading at the same level to the ATMS and with EURGBP spot looking at the top of its range it is believed that these hold the best value on the GBP vol surface. If spot were to continue to fall you would still make money on the delta hedge with it unlikely that the option loses too much volatility as we seem to be basing here at 8.0.

1-Month Vol- GBPUSD

An exotic structure that could be used to slightly cheapen this would be a KO.
1-month 2.0000 GBP call KO 1.9870
Cost: 0.295 % GBP Vanilla 2.0250 GBP call
Maximum gain: Unlimited. Maximum loss: £29,500
Alternatively if you feel spot is likely to drift higher and not extend past the high March high of 2.0330 you can be buying a RKO
1-month 1.9850 GBP call RKO 2.0350
Cost: 0.27 % GBP (Vanilla = 1.19%)
Maximum gain: £245,000 per 10 million notional
Maximum loss: £27,000 per 10 million

GBPUSD