GBP/USD: Put value drops sharply on Brexit optimism

Brexit optimism put a bid under the GBP in Asia.
The sharp drop in the value of put options validates the upside move in the GBP/USD.

Omkar Godbole FXStreet Contributor

The FT reported in Asia that UK's Prime Minister Theresa May has sealed a Brexit deal on financial services.

In response, the GBP/USD pair jumped 90 pips to a session high of 1.2856, confirming a temporary low is in place at 1.2696 (Oct. 30 low).

The recovery rally looks credible as it is backed by a sharp drop in the implied volatility premium for the cheap out of the money GBP puts, risk reversals show.

The one-month 25 delta risk reversals (GBP1MRR) rose to -1.1 today - the highest level since Sept. 20 - from yesterday's print of -1.125. Further, risk reversals stood at -1.8 on Oct. 24.

The recovery in the risk reversals indicates the implied volatility premium or the demand for the GBP puts has dropped sharply in the last seven days.

GBP1MRR

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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