GBP/USD: Put value drops sharply on Brexit optimism

• Brexit optimism put a bid under the GBP in Asia.
• The sharp drop in the value of put options validates the upside move in the GBP/USD.

The FT reported in Asia that UK's Prime Minister Theresa May has sealed a Brexit deal on financial services.

In response, the GBP/USD pair jumped 90 pips to a session high of 1.2856, confirming a temporary low is in place at 1.2696 (Oct. 30 low).

The recovery rally looks credible as it is backed by a sharp drop in the implied volatility premium for the cheap out of the money GBP puts, risk reversals show.

The one-month 25 delta risk reversals (GBP1MRR) rose to -1.1 today - the highest level since Sept. 20 - from yesterday's print of -1.125. Further, risk reversals stood at -1.8 on Oct. 24.

The recovery in the risk reversals indicates the implied volatility premium or the demand for the GBP puts has dropped sharply in the last seven days.

GBP1MRR