###POV: SANGUINE OPTIONS MARKET LEAVES.....>

STERLING: ###POV: SANGUINE OPTIONS MARKET LEAVES CHEAP GBP HEDGING OPPORTUNITIES

-Both EUR/GBP and GBP/USD 3m implied vols touched cycle highs in early December

and have retreated sharply since then, despite the contracts now capturing the

slated EU departure date on Mar29. The moves in volatility markets echo those

seen in betting markets, with an Article 50 extension (least disruptive) seen as

far more likely than a no deal Brexit (most disruptive).

-This follows both EUR/GBP and GBP/USD implied vols trading at the largest

premium over realised vol since the referendum in mid-December, levels that

could easily be revisited should Brexit tensions reach fever pitch ahead of the

self-imposed deadline of March 29th.

-As a result, the cost of hedging against GBP downside via vanilla puts has

fallen sharply, with premiums falling by as much as 25% for some OTM put

strikes. This cost can be reduced further through put spreads (selling the 3m

1.24 put cuts the upfront cost by over 50% versus the 1.27 vanilla put) or by

adding knock-out barriers (1.20 KO barrier trims premium on 1.27 vanilla put to

just 29 GBP pips at the time of writing).