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Options dynamics make for a calmer balance of risks through year-end

GBP
  • Front-end GBP vols are seen inching higher Friday, with one-week implied capturing both the UK and US CPI releases, as well as Friday retail sales.
  • The front-end of the risk reversals curve has improved in tandem - with the one-week contract touching 0.00 (i.e. No vol skew in favour of either puts or calls) for the first time in three years.
  • This sentiment is reflecting in the notable flattening of the GBPUSD SMILE, which traded sharply skewed in favour of OTM puts at the beginning of October, but now sits close to symmetrical thanks to the recovery in 1w GBP/USD call vol over the same period.
  • This makes for a far more balanced near-term outlook for the pair, evident in the multi-year low print for 10d 3m butterfly vol this week.
  • The more sizeable strikes rolling off at the tail-end of next week suggest an element of upside risk in the pair, with cumulative strikes of over Gbp2.0bln rolling off between $1.2250-1.2345 across the Weds - Friday NY cuts.
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