Cable has been in a protracted bear trend since it broke the psychological barrier of 1.5000 last December. More recently however it has been showing signs of a correction after having been driven to extremely oversold levels. Since it reached a recent low of 1.41245 on 20th December it has managed to gain back some ground to current levels above 1.44500.

Sterling’s demise came as the Bank of England (BoE) made a U‐turn in the possibility of raising interest rates while the US went ahead and raised rates in December. This created a scissor effect given the higher interest rate scenario in the US and the now continued low interest rate scenario for the UK.

The outlook for the UK economy however does not seem to be as strong as once thought.
Manufacturing production figures released in December and January both came in with negative numbers ‐0.1% & ‐1.2% respectively. Industrial production released in January was also negative and lower than expected at ‐0.7%.

Whilst PPI (Producer Price Index) which is a measure of inflationary pressure, has been negative since the summer of 2014. Inflation has in fact stayed low throughout 2015, often reaching negative levels. There could be an increase in volatility tomorrow as the BoE holds its scheduled monetary policy meeting. They will also be voting on whether to raise interest rates, but most importantly there will be a press conference by the Governor of the BoE Mike Carney at 12:45 p.m. which should give tips as to what to expect from the BoE going forward.

The US economy doesn’t look as expansive as it did a few months ago; adding to concerns is the slowdown in China which is showing signs of being larger than expected. There are also fears that the state controlled statistics may be manipulated and not showing the true extent of the contraction.

However job creation although not as strong as in 2014 has still been high and was one of the main factors in the Federal Reserve’s decision to raise interest rates. This Friday at 1:30 p.m. Non‐Farm Payrolls will be released with an expected 190k addition to the job market, the previous data was an increase of 292k. If the actual number released differs greatly from the expected we can expect higher levels of volatility.

If you think the volatility of Cable will increase over the next week then you may buy a Straddle which consists of simultaneously buying Call and Put options with the same strike and the same expiry. The screenshot below shows that a Straddle with 1.44813 strike, expiry 7 days and for £10,000 would cost $197.64, which is also the maximum possible loss.

Know your options

This screenshot shows the Profit and Loss profile of the above long Straddle.

Know your options

If on the other hand you feel that volatility will remain flat or fall then you may sell a Straddle which consists of simultaneously selling Call and Put options with the same strike and the same expiry. The screenshot below shows that a Straddle with 1.44721 strike, expiry 7 day and for £10,000 would allow you to pocket $173.00, the total risk of this position would be $462.44.

Know your options

This screenshot shows the Profit and Loss profile of the above short Straddle position.

Know your options

The content provided is made available to you by ORE Tech Ltd for educational purposes only, and does not constitute any recommendation and/or proposal regarding the performance and/or avoidance of any transaction (whether financial or not), and does not provide or intend to provide any basis of assumption and/or reliance to any such transaction.

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD stabilizes near 1.0800 as trading action turns subdued

EUR/USD stabilizes near 1.0800 as trading action turns subdued

EUR/USD holds steady near 1.0800 on Thursday and remains on track to end the day in negative territory following upbeat macroeconomic data releases from the US. The action in financial markets turn subdued as trading volumes thin out heading into Easter holiday.

EUR/USD News

GBP/USD extends sideways grind above 1.2600

GBP/USD extends sideways grind above 1.2600

GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth help the USD stay resilient against its rivals and limits the pair's upside.

GBP/USD News

Gold pulls away from daily highs, holds above $2,200

Gold pulls away from daily highs, holds above $2,200

Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.

Gold News

XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC

XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC

XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase. 

Read more

Portfolio rebalancing and reflation trades emerge into Q2

Portfolio rebalancing and reflation trades emerge into Q2

Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.

Read more

Majors

Cryptocurrencies

Signatures