Analysis by ProfitingWithForex.com
All eyes are on the BoE this week, which makes the GBP/USD an interesting pair to trade. The news and hype around the monetary policy release this week could lead to a lot of volatility and potential profits. However, what direction will the breakout occur? There is a way to take advantage of this kind of potential energy before a news announcement without having to make a directional forecast.Â
One way to potentially profit from this move is with an option straddle. There are a few advantages of a straddle. First they are fixed risk, you can't lose more than you put into the trade in the first place.Â Second, the maximum loss is extremely unlikely since it can only occur if the market closes at expiration at exactly the strike price you bought. Finally, although a straddle has fixed risk, it still offers unlimited potential gains. If the market moves a lot you can profit a lot. The biggest disadvantage of a straddle are that they are expensive. The market has to move a lot to get to profitability. That is why they are best on a pair that you really expect some near term volatility on.
In the chart below I graphed the profit and loss range of a straddle on the GBP/USD. If the market can get beyond either barrier before expiration on the 18th of January, profits start accumulating. In light of recent moves, I think this is an interesting trade to monitor.