With markets pricing an 85 percent chance of a 25-basis-point BoE cut on August 7, some see complacency creeping in – prompting at least one British bank to highlight value in GBP call gamma as a hedge against a no-cut surprise.
Gamma in FX options reflects how quickly an option’s value can rise when the underlying currency moves. GBP call gamma, for instance, gains value if sterling rallies sharply.
Traders favour gamma exposure when they anticipate sharp or unexpected moves, as it can deliver outsized returns from directional surprises – such as the BoE holding rates when a cut is largely priced in.
Gamma exposure is typically highest in short-dated FX options with strikes near the current spot, where even modest moves can deliver outsized returns. The goal for holders is to cap-ture enough spot volatility to outweigh the premium paid.
