FX Options Trading Class 7 Gregory McDermott, MApp Fin OU Chief FX - PowerPoint PPT Presentation

FX Options Trading Class 7 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

FX Spot Straddle Review • Long 100 Straddles for 6 WCO Pairs – Aug 20-25 – Aug 25-Aug 29 – WCO Losses ($6500) – FX Spot Profit $ 12,236.26 – Trade Profit $5736.26 • Straddle Trade is not a Directional Trade • Easy to exit and Re-Establish

FX Spot Trading Strangle

Spot Trading Strangle • Purchase Front Month Puts & Calls based on Your Risk Profile – Tight Strangle - 50 pips up and down – Moderate Strangle – 100 pips up and down • Coordinate the Strangle strike to know support and resistance levels • Options Ratio minimum of 1:1 – Could Increase Ratio to allow targeted buying or selling

FX Spot Trading Collar

Spot Trading Collar • Long / Short FX Spot Position • Buy Near-Term Puts & Sell Near-Term Calls around your Spot Position • Coordinate the Collar’s strikes to known support and resistance levels • Exit strategy based on your price levels • Options Ratio minimum of 1:1 • Higher ratio would allow you to increase your position through options in the opposite direction.

Spot Trading Collar • Collar Cost – Pay $.43 for XDN Sept 90.00 Puts – Sell XDN Sept 93.00 Calls @ $.55 – $.12 Credit • Profit - Sell out our long position @ $93.12 until September Expiration • Stop-Loss – Sells out our long position @ $90.12 until September Expiration • Options can be rolled only to lock-in profits. Moving the stop-loss put eliminate the value of options.

Weekend FX Spot Trading

Weekend Spot Trading • Own or initiate a Spot position that you would like to carry over a weekend. • Stop or Stop Loss Orders DO NOT protect you while the FX Market is Closed . • Buy a Protective Put or Call to “Insure” your Spot Position – 1:1 Ratio – 1 WCO for each FX Mini Lot

Weekend Spot Trading • Options not the focus of the trade • Inexpensive way to protect a spot trade • Initiate a Weekend “Event Trade” – Weekend OPEC Meeting – G8 Summit

WCO “Futures Replacement”

WCO Futures “Replacement” • Purchase an ITM Call (Put) to Initiate a Long (Short) Currency Position vs USD. • Directional Trade • Limited Risk • Allows for a Longer Term Time Horizon • Can minimize the effect of short-term market swings

WCO XDE Example • Purchase 10 XDE July 153.00 Call • $3550 (Debit)

WCO XDE Example

WCO XDE Example • Purchase 10 XDE June 153.00 Call • $3550 (Debit) • Sell 10 XDE June 153.00 Call & Purchase 10 XDE June 156.00 Call • $5600.00 (Credit) - $3650.00 (Debit) = $1950.00 (Credit) • Now Own 10 XDE June 156.00 for $1.60 • $3550 - $1950= $1600.00

WCO XDB Example • Purchase 10 XDB Nov 177.00 Call • $6335 (Debit)

WCO XDB Example

WCO XDB Example • 8/29/08 Purchase 10 XDB Nov 177.00 Call • XDB Closes @ 182.32 • $6550 (Debit) • 9/2/08 XDB Closes @ 178.20 – XDB Nov 177 Calls $3.70 / $3.85 • Protection of Option in effect while futures market closed • Allowed you chance to be wrong, not blown out.

WCO Futures “Replacement” Advantages • Directional Trade • Limited Risk • Allows for a Longer Term Time Horizon • Can minimize the effect of short-term market swings • Allows you to Lock-In Profit while still maintaining the same position size.

WCO Covered Calls

Covered Calls - WCO • Long a Deep in the Money Long Term Call Option or Underlying Future • Sell Front Month ATM or OTM Call to collect Premium in a 1:1 Ratio • Strategy is design for trader who wants to be long the underlying pair as a long-term investment. • Collected Option Premiums help reduce the cost of the underlying • UNLIMITED RISK

Covered Calls

Covered Calls XDE March

Covered Calls XDE March

Covered Calls XDE March • Buy 10 XDE March 137.00 Calls for $9.35 – $9350.00 Debit • Sell 10 XDE Sep 148.50 @ $.70 – $700.00 Credit • Sell following months as front expires – 6 months @ $700.00 = $4200.00 • Net Cost of the XDE March 137.00 Calls when March becomes the front month now $5.15 or $5150.00

Covered Calls - Spot • Long Spot FX • Sell Front Month OTM Call to collect Premium in a 1:1 Ratio • Buy-Rite – Initiated for a short term premium and target exit

XDB Buy – Rite

XDB Buy – Rite • Buy 10 XDB FX Spot 1.8395 • Sell 10 XDB Sep 186.00 @ $.88 – $880.00 Credit • Looking for a spot appreciation with a targeted exit point. • Effectively selling the Spot @ 1.8688 • UNLIMITED RISK

Covered Calls

WCO Covered Puts

Covered Puts - WCO • Long a Deep in the Money Long Term Put Option or Underlying Future • Sell Front Month ATM or OTM Put to collect Premium in a 1:1 Ratio • Strategy is design for trader who wants to be short the underlying pair as a long-term investment. • Collected Option Premiums help reduce the cost of the underlying • UNLIMITED RISK

Covered Put P&L

Covered Puts XDS March

Covered Puts XDS March

Covered Put • Buy 10 XDS March 99.00 Puts for $8.89 – $8,900.00 Debit • Sell 10 XDS Sep 88.50 Puts @ $.21 – $210.00 Credit • Sell following months as front expires – 6 months @ $210.00 = $1260.00 • Net Cost of the XDS March 99.00 Puts when March becomes the front month now $7.63 or $7630.00

Covered Puts - Spot • Short Spot FX • Sell Front Month OTM Put to collect Premium in a 1:1 Ratio • Sell-Rite – Initiated for a short term premium and target exit • UNLIMITED RISK

Covered Put P& L

XDA Sell - Rite

XDA Sell - Rite • Sell 10 AUD/USD FX Spot .8559 • Sell 10 XDA Sep 83.50 Puts @ $.57 – $570.00 Credit • Looking for a spot appreciation with a targeted exit point. • Effectively buying the Spot @ .8502 • UNLIMITED RISK

Covered Call& Puts • UNLIMITED RISK • Synthetic Short Put or Short Call • Risk return must be considered prior to initiating your position – How much can I make and at what Risk? • Premium Collection Strategies perform best in sideways or range-bound markets.

WCO Vertical Spreads

WCO Vertical Spread • Vertical spreads are either Call or Put • Simultaneous purchase and sale of calls/puts in the same month • Buying or selling the spread refers to premium payment (buying) or collection (selling) • Spreads should always priced between Zero and the Distance between the strikes. • Directional Trade

WCO Vertical Spread • Limited Risk for the Buyer and Seller – Buyer’s loss limited to the price paid for the spread – Seller’s loss limited to the max value of the spread minus premium collected • Unique feature for seller • Limited Profit Potential – Buyer’s profits is limited to the max value of the spread minus premium paid. – Seller’s profit limited to premium collected selling the spread

XDE Vertical Call Spread

XDE Vertical Call Spread

XDE Vertical Call Spread • XDE Sept 145.00 / 146.50 Call – Pay $.69 for 10 • $690 Debit – Max Value @ Expiration $1.50 – Max Profit for 10 Lot • $1.50 - $.69 = $.81 • $.81 x 10 = $810.00 – Max Loss $690.00 – Break-Even Point 145.69

XDC Vertical Put Spread

XDC Vertical Put Spread

XDC Vertical Put Spread • XDC Oct 93.50 / 91.50 Put – Sell 10 @ $.67 • $670.00 Credit – Max Value @ Expiration $2.00 – Max Profit for 10 Lot @ 93.50 or higher • Spread expires worthless • Keep $670 Premium collect on sale – Max Loss $1,330.00 ($2.00 - $.67 = $1.33) – Break-Even Point 92.83

WCO Vertical Spread Exit • Hold the long or short position until expiration – Do Nothing • Close position with counter transaction – Long Spread = Sell Spread – Short Spread = Buy Spread