GBP/USD Drops Ahead of Preliminary GDP Data
GBP/USD is heading south this morning ahead of the UK's preliminary GDP data at 08:30 GMT, expected to show growth at 0.7% quarter on quarter versus the previous 0.4%. There are three GDP annoucements a month with prelim GDP being the first hence it tends to have the most impact. The pair now trades at 1.5540 (from 1.5580). Yesterday we saw a rally to the high 1.55's which the market consensus has viewed as too high ahead of the GDP data today.
If you expect GDP to come out strong and sterling to recover to move towards 1.5600 or higher you may take a short-term Call option position. A Call gives you the right to buy at a certain price for a certain period of time. The 1-day Call option to buy 10,000 GBP at 1.5550 will cost you 35 USD. If GBP/USD rises above 1.5620 by expiry tomorrow (at 14:00 GMT) you will make at least 100% profit, if the pair does not rise you will lose a maximum of 35 USD, that is the premium you paid to buy the option.
If you expect GDP to be lower than 0.7% and sterling to continue weakening today, to fall below 1.5500, you may take a short-term Put position. A Put gives you the right to sell at a certain level for a certain period of time. A 1-day Put to sell 10,000 GBP at 1.5530 will cost you 28 USD. If GBP/USD falls below 1.5474 by expiry you will make at least 100% profit, if the paid does not fall you will lose the premium you paid for the option (28 USD).
The 'strike', this is simply the price at which the option holder has the right to trade until the contract has expired. When buying a Call you have the right to buy at a specified strike and when buying a Put you have the right to sell at a specified strike. You choose the strike depending on your market outlook before opening an option position. Note that entering a strike away from the current market rate means the option will be cheaper to buy (and hence your risk is less) but it also means the market needs to move further before you are in profit. The next word is 'expiry', this is simply the date the option expires. Again, you can choose this variable before opening the trade. Note that, options with shorter durations are cheaper to buy.
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