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BUZZ-COMMENT-Monetise GBP volatility and benefit if barriers break

Credit: REUTERS/DADO RUVIC

GBP/USD is volatile, frustrating traders and those looking for a directional move and a potential break above March highs and option barriers by 1.3200, but there's a low risk way to monetise this situation.

Aug 5 (Reuters) - GBP/USD is volatile, frustrating traders and those looking for a directional move and a potential break above March highs and option barriers by 1.3200, but there's a low risk way to monetise this situation.

A simple vanilla straddle option is designed to capture volatility, regardless of direction. Holders pay a premium for the right to buy or sell GBP/USD at a fixed rate (strike) and expiry, based on the option's implied volatility.

That implied volatility is a perception of how much actual volatility GBP/USD will see before expiry, so actual volatility needs to outperform it to offset the premium cost and generate profit. Holders will neutralise the option's strike risk by buying GBP/USD below and selling above the strike at intervals, known as delta hedging - which is where the potential profit -- or losses -- are made.

If actual and/or implied volatility increase once the option has been purchased, profits are assured. Should either decrease, the option can be sold on, to bank profit or minimise loss potential. Related

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1-week GBP/USD volatility measureshttps://tmsnrt.rs/33s61Oh

(Richard Pace is a Reuters market analyst. The views expressed are his own)

((Richard.Pace@thomsonreuters.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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