Embracing the Brexit volatility weekend

Merav Brenner ORE

Brexit Concerns Driving the Markets; Largest One Day Rally in Cable in Seven Years, June 20th

Cable has been taking a beating over the past two weeks as Brexit concerns have been on the rise. Many polls appeared recently showing the Leave campaign with a small advantage over Remain. During this time Cable reached a most recent low of 1.40116last Thursday, after failing to break 1.4740 on the upside towards the end of May.

Yesterday, news hit the markets of the latest poll where the Remain campaign was now showing a lead. The market reacted favorably and the price of GBPUSD went from Friday’s close at 1.4376 to a high yesterday of 1.47071. That one day jump was Sterling’s largest rally against the US dollar in seven years.

As we get closer to the Brexit referendum on Thursday 23rd we may be in for a bumpy ride, and maybe even more record breaking one day moves. Volatility has already been on the rise for GBPUSD, but as new polls are released as we get ever closer to voting day we me get a flurry of price direction changes.

More importantly this Friday could prove to be one of the most volatile days in Cable for a long time. The markets have not entirely discounted either outcome for the referendum. It is therefore likely that once forecasts for the election results filter through to the market price will adjust rapidly and sharply. Initial election results will be released during the very early hours of the morning on Friday.

If you feel there will be a spike in volatility over the next week then you maybuy a Straddle strategy, which consists of simultaneously buying a Call and a Put option with the same strike, expiry and amount.

The screenshot below shows a GBPUSD Buy Straddle with a 1.46785 strike, expiry 7 days and for £10,000 would cost $658.57, which would also be the maximum risk.

This screenshot shows the profit and loss profile of the above Buy Straddle strategy, just click the Scenarios button.

On the other hand, if you feel volatility will decrease or stay flat of the next week then you may sell a Straddle strategy, which consists of simultaneously selling a Call and a Put option with the same strike, expiry and amount.

The screenshot below shows a GBPUSD Sell Straddle strategy with a 1.46766 strike, 7 day expiry and for £10,000 would generate $635.13 in revenue, with a total risk of $928.67.

This screenshot shows the profit and loss profile of the above Sell Straddle strategy.

Author

Merav Brenner

ORE

Merav Brenner specializes in FX and commodity options and works at ORE, a leading technology company providing retail-friendly vanilla option solutions for brokers and banks.

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