FX Options Trading Class 2 Gregory McDermott, MApp Fin OU Chief FX Strategist
• U.S. Government Required Disclaimer – Foreign Exchange trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the fx markets. Don't trade with money you can't afford to lose. This website is neither a solicitation nor an offer to Buy/Sell options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.
WCO Currency Pairs • HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN .
Open a Paper Trading Account • Think or Swim – www.optionsuniversity.com/TOS • Case Sensitive!
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Currency Pairs • The Exchange Rate of a Currency Pair is the Number of Units of the Counter Currency that 1 Unit of the Base Currency can purchase.
Currency Pairs • GBP/USD • Base Currency • 1 st Currency in the Pair • Currency is Bought • Counter Currency • 2 nd Currency in the Pair • Currency is Sold or Borrowed • A Currency Pair Always represents a simultaneous sale and purchase of 2 currencies
Currency Pairs • Example • EUR/USD = 1.4750 – What is the Base Currency? • EUR – What is the Counter Currency? • USD – What does this quote tell us? • $US 1.4750 = 1.0000 EUR
Currency Pairs • Example • USD/CHF = 1.0920 – What is the Base Currency? • USD – What is the Counter Currency? • CHF – What does this quote tell us? • 1.0920 CHF = 1.0000 USD
Currency Pips • Contract Sizes – 100,000 Units of Base Currency • A “LOT” • 3 lot controls 300,000 base currency – 10,000 Units of Base Currency • Mini Contract or Mini Lot • 7 mini-lots control 70,000 base currency
Currency Pips • A “PIP” is the smallest unit of measure for movement in the FX Market – Acronym for “Percentage in Point” – Futures Market calls this unit a “Tick” – EUR/USD = 1.4750 • It’s the last decimal place in the quote • EUR/USD = 1.475 0
Currency Pips • Value of a PIP – 100,000 Units of Base Currency • Example – Long 5 USD/CAN = .9950 – USD/CAN = 1.0050 – Profit/Loss ? • Profit $CAN 5000.00 • 5 x $CAN 1000 ( 100 pips @ $CAN 10.000 per)
Currency Pips • Opening Trade USD/CAN – $US 100,000 exchanged for $CAN 99,500 • USD/CAN .9950 • 5 x $CAN 95,000 = $CAN 497,500 • Closing Trade – $CAN 100,500 exchanged for $US 100,000 • USD/CAN = 1.0050 • 5 x $CAN 100,500= $CAN 502,500 • Profit – $CAN 502,500 - $CAN 497,500 = $CAN 5000.00
Bid / Offer Spreads • Financial Two-Sided Markets – Buyers always bid – Seller always offer • Refers to Long/Shorts contracts, not to the direction needed for profit
Bid / Offer Spreads • Trader Talk – Bid • “Price for Quantity” – 1.00 Bid for 10 AUD/USD Spot – Offer • “ Quantity at Price” – 10 at 1.00 AUD/USD Spot
Bid / Offer Spreads • What is the Current Bid? – 1.5677 • What is the Current Offer? – 1.5679 • What price will YOU buy $10,000 EUR/USD? – 1.5679 • What price will YOU sell $10,000 EUR/USD? – 1.5677 • How wide is the market? – 2 pips
FX Spot Margin • Allows a trader to leverage the cash in their trading account – Don’t need full cash value of the trade • Margin up to 100:1 for 100,000 Unit and 10,000 Unit Trades • Leverage must be managed!
Order Types • Market • Limit • Stop / Stop Loss • One Cancels Other / OCO • Day Order • Good till Cancelled / GTC • Good till Close of Market - TOS
Questions?
Long calls have a right to buy a currency pair… …short calls have an obligation to sell a currency pair.
Long Call P&L
Short Call P&L
Long puts have the right to sell a currency pair… …short puts have the obligation to buy a currency pair.
Long Put P&L
Short Put P&L
WCO Currency Pairs • British Pound/USD – XDB • Euro/USD – XDE • Canadian Dollar/USD - XDC • Australian Dollar/USD – XDA • Swiss Franc/USD – XDS • Japanese Yen/USD – XDN
WCO Contract Sizes • British Pound – 10,000 GBP • Euro – 10,000 EUR • Canadian Dollar - 10,000 CAN • Australian Dollar – 10,000 AUD • Swiss Franc – 10,000 Swiss Francs • Japanese Yen – 1,000,000 Yen
WCO “ Right-Sized ” for Retail Investors • Contract Point Value • 100 Basis Point = $100.00 • 1 Option Contact Priced @ 2.50 cost the Investor $250.00 • 1 Option Contract Price Movement of $.01 Equals $1.00
WCO Contract Sizes • British Pound – 10,000 GBP • Euro – 10,000 EUR • Canadian Dollar - 10,000 CAN • Australian Dollar – 10,000 AUD • Swiss Franc – 10,000 Swiss Francs • Japanese Yen – 1,000,000 Yen
WCO Expiration Specs • European Exercise • Expiration Date is the Saturday following the 3 rd Friday of the Expiration Cycle. • Settlement Value based on the 12:00 Noon (Eastern) Buying Rate as determined by the NY Fed on the last trading day prior to expiration • US Dollar Cash Settlement
PHLX WCO • Trading Hours 9:30am to 4:00pm (Eastern US Time) • Position Limits: 200,000 contracts on the same side of the market • All Trades Issued and Guaranteed by The Options Clearing Corp ( OCC)
PBOT World Currency Futures • Futures traded as the Underlying to the PHLX World Currency Options • Hedge to WCO Position • Also a Stand-alone Trading Instrument
PBOT World Currency Futures • British Pound – 10,000 GBP • Euro – 10,000 EUR • Canadian Dollar - 10,000 CAN • Australian Dollar – 10,000 AUD • Swiss Franc – 10,000 Swiss Francs • Japanese Yen – 1,000,000 Yen
PBOT World Currency Futures Symbols • British Pound/USD – BP9 • Euro/USD – EU9 • Canadian Dollar/USD - CA9 • Australian Dollar/USD – AD9 • Swiss Franc/USD – SF9 • Japanese Yen/USD – JY9
WCO Recap • FX Trading sized for the Retail Investor • Trade in a Volatile Market with the Advantages of Options • Open Traditional US Market Hours • Trades like a US Index Option • Equity options strategies and math work for the PHLX WCO
PBOT World Currency Futures • Trading Hours 8:20 am to 4:15pm (Eastern US Time) • Expiration Date is the Saturday following the 3 rd Friday of the Expiration Cycle. • Settlement Value based on the 12:00 Noon (Eastern) Buying Rate as determined by the NY Fed on the last trading day prior to expiration • US Dollar Cash Settlement • All Trades Issued and Guaranteed by The Options Clearing Corp ( OCC)
Fundamental Analysis • What is Fundamental Analysis? – The study of macroeconomic factors and their effect on the value of a currency • Economic • Social • Political
Fundamental Analysis • US Dollar – Strong, Active Federal Bank – Dependence on Oil
Fundamental Analysis • Canadian Dollar – Only Major Currency that is a oil exporter – Represents up to 8% of economy – Central Bank slow to intervene
Fundamental Analysis • Australian Dollar – Low Household debt – Low Government debt – Abundant Natural Resources • Especially precious metals
Fundamental Analysis • Japanese Yen – Central Bank Aggressive in Policy towards “Cheap” Yen • Low Interest Rates • Desire to run a Trade Surplus – Imports nearly 100% of it’s oil
Fundamental Analysis • British Pound – Active Central Bank – Weakening Housing Market
Fundamental Analysis • Euro – Central Bank is a group of European Government Banks
“Cross Rate” Trade • A “Cross Rate” is a Currency Pair that does not include the USD • Examples of Active Cross Rates • EUR/GBP (Euro to British Pound) • EUR/JPY ( Euro to Japanese Yen) • GBP/CHF (British Pound to Swiss Franc) • AUD/JPY (Australian Dollar to Japanese Yen)
Cross Rate with PHLX World Currency Options • Ability to create a “Synthetic” Cross Rate Option • Buy a Call and a Put in Different Currencies – Example: • Buy XDE Call and XDB Put in Ratio – USD Cancels outs – Create Long EUR & Short GBP Position
Cross Rate with PHLX World Currency Options • EUR/GBP Cross • EUR/USD 157.00 GBP/USD 198.00 EUR/USD divided by GBP/USD 157.00 / 198.00 = .7929 So it takes .7929 pound to buy 1.00 Euro
Cross Rate with PHLX World Currency Options • AUD/CAN Cross • AUD/USD 87.00 CAN/USD 94.00 EUR/USD divided by GBP/USD 87.00 / 94.00 = .9255 So it takes .9255 CAN to buy 1.00 AUD
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