FX Options Trading Class 4 Gregory McDermott, MApp Fin OU Chief FX - PowerPoint PPT Presentation

FX Options Trading Class 4 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 .

Review

Technical Analysis Tools • Candlestick Charts • Moving Averages • Support & Resistance • Stochastics • RSI • Bollinger Bands • Fibonacci Retracements • Pivot Points

Money Management • The Key to becoming a successful trader is money management. • Each trade should be entered with a profit target and loss limit. – Adjust your plan to allow profits to run – Never increase your loss limit in hopes of a directional turn in the spot market

Money Management • The 2:1 Math – What % of winning trades must I do to beak even? – 33% or 1 out of 3 trades • Example – 10winner @ $2,000.00 =+$20,000.00 – 20 losers @ -$1,000.00 = -$20,000.00

Money Management • The 2:1 Math – What % of winning trades must I do to beak even? – 33% or 1 out of 3 trades • Example – 10winner @ $2,000.00 =+$20,000.00 – 20 losers @ -$1,000.00 = -$20,000.00

WCO & Spot FX • Combine the power of PHLX World Currency Options with an easy Hedge today. • Provides the chance to trade the markets day or night. • Carry long option positions with the added earning power of hedging • NOT of perfect hedge

WCO & Spot FX Hedging Pitfalls • The options do not settle to hedge spot position • Expiration – Be prepared to roll the options and keep the hedge or CLOSE both sides – Do not let the options expire • Margin Implications • Math, Math and More Math – May need to Buy Spot to hedge Long Delta • USD/CHF, USD/JPY, USD/CAN – Calculate & Track Delta by hand with TOS

Gamma Trading

Gamma Basics • Delta - Hedge Ratio or Rate of Change – Percentage Chance an option will expire In the Money • Underlying or Hedge = 100

• Delta - Hedge Ratio or Rate of Change Gamma Basics

Gamma Basics • Gamma – Rate of Change of Delta • Based on the Strike • All Long Options have Pos Gamma • All Short Options have Neg Gamma • Positive Gamma provides the opportunity to Sell High and Buy Low when Currencies move.

• Gamma – Rate of Change of Delta Gamma Basics

Gamma Basics • Theta – Time Decay • The Amount of Value an option loses each day, all things equal. • Based on the Strike • Long Options have Neg Theta • Short Options have Pos Theta

Gamma Basics • Theta – Time Decay

Gamma Basics • Gamma Trading comes down to a simple question…….. – Can I Cover my Decay?

Gamma Basics • Straddle = Long (or Short) a Call and a Put in the Same Month and Strike. • Maximum Gamma when straddle is the ATM Straddle • Strangle = Long ( or Short ) an OTM Call and OTM put in the Same Month • Less Gamma but Less Expensive

Gamma Basics

Gamma Basics • Gamma Trading has defined concepts • Success can be as much art as science – When to hedge? • 200 Delta? 500 Delta? 1000 Delta? – Should I lean into my gamma? – What day is it? • Weekend • Holiday • Summer

Gamma Basics • XDE (GBP/USD)= 148.00 • GBP/USD Spot • +50 148.00 Straddles Price Gamma Delta Hedge Delta 147.00 1000 -1000 +10 Mini 0 Lots 147.50 1000 -500 +5 Mini Lots 0 148.00 1000 0 0 148.50 1000 +500 -5 Mini Lots 0 149.00 1000 +1000 -10 Mini 0 Lots

Gamma Basics • XDE (GBP/USD)= 148.00 • GBP/USD Spot • +50 148.00 Straddles Price Delta Hedge Price Profit 147.00 -1000 +10 Mini Lots 148.00 1000 pips $1000 147.50 -500 +5 Mini Lots 148.00 500 pips $500 148.00 0 148.00 0 148.50 +500 -5 Mini Lots 148.00 500 pips $500 149.00 +1000 -10 Mini Lots 148.00 1000 pips $1000

Gamma Basics • XDN (JPY/USD)= 91.00 • USD/JPY Spot • +50 91.00 Straddles Price Gamma Delta Hedge Delta 90.00 1000 -1000 -10 Mini 0 Lots 90.50 1000 -500 -5 Mini Lots 0 91.00 1000 0 0 91.50 1000 +500 +5 Mini Lots 0 92.00 1000 +1000 +10 Mini 0 Lots

Gamma Basics • XDN (JPY/USD)= 91.00 • USD/JPY Spot • +50 91.00 Straddles Price Delta Hedge Price Profit 90.00 -1000 -10 Mini Lots 91.00 1000 pips $1000 90.50 -500 -5 Mini Lots 91.00 500 pips $500 91.00 0 91.00 0 91.50 +500 +5 Mini Lots 91.00 500 pips $500 92.00 +1000 +10 Mini Lots 91.00 1000 pips $1000

WCO Long Gamma Strategy • WCO Straddle w/ WCO • WCO Straddle w/ FX Spot • FX Spot Strangle • FX Spot Collar • Weekend Spot Protection

WCO Gamma Trading

WCO Long Gamma Trade • Purchase Current ATM Straddle • Hedge to Delta Neutral using PHLX World Currency Options • Never Net Short Options • Take advantage of the natural gaps due to defined trading hours • PBOT Futures also a Hedging Tool for World Currency Options • True Hedge – Both Settle to USD Cash

WCO XDB Example

WCO XDB Straddle

May 5 – June 16, 2008 WCO XDB Chart

– Straddle <$15,675.00> – Hedge $22,284.50 – Profit $6609.50 •

May 5 – June 16, 2008 WCO XDE Chart

May 5 – June 16, 2008 WCO XDC Chart

May 5 – June 16, 2008 WCO XDS Chart

May 5 – June 16, 2008 WCO XDN Chart

May 5 – June 16, 2008 WCO XDA Chart

WCO Long Gamma Trade Advantages • Trade the Hedge “with’ the underlying FX currency move. • Gaps on the opening appear regularly • Limit orders can be placed at defined intervals

WCO & FX Spot Gamma Trading

WCO & Spot FX • Delta of Spot/Cash FX is 100 for One (1) $10,000 Contract • Option Deltas available on your brokerage platform ( 0 – 100) • World Currency Options DO NOT Settle to FX Spot • Trading to Capitalize on the constant movement of FX Spot with WCO Protection

WCO & Spot Gamma Trading Range Approx 86.20 to 88.15 8/20/08 – 8/25/08

Greg’s WCO Spreadsheet

Greg’s WCO Spreadsheet

Greg’s WCO Spreadsheet

Greg’s WCO Spreadsheet

Greg’s WCO Spreadsheet

WCO & Spot Gamma Trading Symbol Quant Month Profit Price Sold P&L XDA 100 Oct 87.00 $3.29 $3.32 $300.00 XDB 100 Oct 187.00 $5.96 $5.92 ($400.00) XDC 100 Oct 94.50 $4.92 $4.68 ($2400.00) XDE 100 Oct 148.00 $2.82 $2.87 $500.00 XDN 100 Oct 92.00 $3.04 $3.07 $300.00 XDS 100 Oct 92.0 $3.35 $3.21 ($1400.00) Total ($3100.00)

WCO & Spot Gamma Trading • FX Spot Gamma Trading Profit • $6,217.41 • ($3,100.00) • $3,117.41 Profit Minus Transaction Cost

WCO & Spot FX • No Transaction Fees for Spot Gamma Trades • Trade on YOUR Schedule ANYWHERE in the World • Low Daily Theta / Decay Number for WCO • Clearly Defined Trading Parameters • Traded a Risk Averse or Aggressive Style • Easy Entry and Exit of All Sides of the Trade

Thank You. Gregory McDermott, MApp Fin OU Chief FX Strategist