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Jun 29 - 08:55 AM

GBP/USD - COMMENT-Options Offer Some Insight Into GBP/USD Fog

By Richard Pace  —  Jun 29 - 07:05 AM

Those worried about the uncertain GBP/USD outlook should look at options, where pricing offers some insight into market expectations while participation would offer some protection against adverse moves.

Option dealers typically bet on actual volatility and its performance in relation to implied volatility -- a key component in the price of options.
Longs hope actual volatility will outperform, while shorts hope it underperforms.

GBP/USD has the second highest benchmark 1-month implied volatility in G10 FX, yet comparing it to past actual volatility measures for 1-month would suggest that longs could still profit from a repeat spot performance over the coming month, and be adequately protected if volatility increases.

Risk reversal contracts show a substantial implied volatility premium for GBP puts over calls (GBP/USD downside versus upside).
It's 1.45 vols for a 1-month expiry and 2.65 vols for 1-year.
This shows dealers are pricing a much greater perceived risk of GBP/USD falling, opposed to gaining.

While Brexit and the novel coronavirus hang over the UK economy, GBP will retain volatility and downside risk premium, with option market pricing reflecting to what degree.


For more click on FXBUZ


1-3-12-month GBP/USD risk reversals Click here

GBPUSD 1-month volatility Click here

Source:
Refinitiv IFR Research/Market Commentary

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