FX Options Trading Class 8 Gregory McDermott, MApp Fin OU Chief FX - PowerPoint PPT Presentation

FX Options Trading Class 8 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

WCO “Futures Replacement”

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 - 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 • UNLIMITED RISK

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 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 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 Calender Spreads

Calendar Spreads • Purchase and Sale of Options in Different Expiration Months – Time Spread or Horizontal Spread • Options can be on Different Strikes • Spreads can be structured as premium collection, a volatility play or delta neutral using options in ratio • Be Aware of your Net Option Position

Calendar Spreads • Buy XDS Sept / Oct 90.50 Call Spread – Buy 10 Oct 90.50 Calls ($1.53) – Sell 10 Sept 90.50 Calls ($.98) • Collect $.55 Premium as the Front Month Option Decays • Reduce the cost of owning the Out Month Option

Calendar Spreads • Sell XDE Sept / Oct 145.00 – 1:2 Put Spread – Sell 10 Oct 145.00 Put ( $2.34) – Buy 20 Sept 145.00 Puts ($1.47 ea) – $.60 Debit • Finance the Front Month Puts • Acquire a Short Delta & Long Gamma

WCO Synthetic Positions

Synthetic Positions • Long Put=Short Future +Long Call – Month and Strike of the Call Must Be the Same as the Put you are trying to “create” – P&L replicates the Long Put P&L – May be a more efficient way to own WCO Puts – Algebra to calculate other Synthetics P&L • Synthetic Futures Pricing** – Futures $= Call$ - Put$ + Exercise$ +Carry Cost – Futures$ = 4.55-1.35+100.00 +.15 – Futures$ = 103.35 • ** Options Volatilty & Pricing, Natenberg, Page 221

Synthetic Positions • Call – Put = Underlying (Future / Stock) – Simple equation allows you to identify ways to construct similar P&L • Profit and Risk potential – Recognize the effect of adding or subtracting form your position • Positive and Negative

WCO Butterflies

Butterfly • 4 Options Spread – All Calls or All Puts • 3 Equidistant Strike in Same Month – Oct 92.00 / 94.00 / 96.00 • Middle Strike = “Body” – 2 ATM Calls / Puts • Outside Strikes = “Wings” – 1 OTM Call / OTM Put on each wing • Limited Risk & Limited Reward

Butterfly • Long Butterfly – Long the “Wings” • +1 Oct 92.00 C/P & +1 Oct 96.00 C/P – Short the “Body” • -2 Oct 94.00 C/P • Short Butterfly – Short the “Wings” • -1 Oct 92.00 C/P & -1 Oct 96.00 C/P – Long the “Body” • +2 Oct 94.00 C/P

Butterfly • Long Put Butterfly • 90 / 94 / 98 • Net Credit $1.00 – Max Profit = Net Credit / Pin @ Short Strike • $1.00 – Max Loss = Diff in Strikes – Net Credit • $3.00 – Upper B/E = Short Put Strike - Net Credit • 97.00 – Lower B/E = Short Put Strike + Net Credit • 91.00

WCO Iron Butterflies

Iron Butterfly • 4 Options Spread – Vertical Put Spread and Call Spread – Straddle vs. Strangle • 3 Strike in Same Month – Oct 92.00 / 94.00 / 96.00 • Middle 2 Strike = “Body” – 1 ATM Call & 1 ATM Put for each Strike of Body • Outside Strikes = “Wings” – 1 OTM Call / OTM Put on each wing • Limited Risk & Limited Reward

Iron Butterfly • Long Iron Butterfly – Long the “Wings” • +1 Oct 92.00 Put & +1 Oct 96.00 Call – Short the “Body” • -1 Oct 94.00 Put & -1 Oct 94.00 Call • Short Iron Butterfly – Short the “Wings” • -1 Oct 92.00 Put & -1 Oct 96.00 Call – Long the “Body” • +1 Oct 94.00 Put & +1 Oct 94.00 Call

Iron Butterfly • Long Iron Butterfly • 90 / 94 / 98 • Net Credit $1.50 – Max Profit = Net Credit • $1.50 – Max Loss = Diff in Strikes – Net Credit • $2.50 – Upper B/E = Short Call Strike + Net Credit • 99.50 – Lower B/E = Short Put Strike – Net Credit • 88.50

WCO Condors

Condor • 4 Options Spread – All Calls or All Puts • 4 Strike in Same Month – Oct 92.00 / 94.00 / 96.00 / 98.00 • Middle 2 Strike = “Body” – 2 ATM Calls/Puts for each Strike of Body • Outside Strikes = “Wings” – 1 OTM Call/Put on each wing • Limited Risk & Limited Reward

Condor • Long Condor – Long the “Wings” • +1 Oct 92.00 C/P & +1 Oct 98.00 C/P – Short the “Body” • -1 Oct 94.00 C/P & -1 Oct 96.00 C/P • Short Condor – Short the “Wings” • -1 Oct 92.00 C/P & -1 Oct 98.00 C/P – Long the “Body” • +1 Oct 94.00 C/P & +1 Oct 96.00 C/P

Condor • Long Call Condor • 92 / 94 / 96 / 98 • Net Credit $.60 – Max Profit = Net Credit / Between The Strikes • $.60 – Max Loss = Diff in Strikes – Net Credit • $1.40 – Upper B/E = Short Call Strike - Net Credit • 97.40 – Lower B/E = Short Put Strike + Net Credit • 92.60

WCO Iron Condors

Iron Condor • 4 Options Spread – Vertical Put Spread & Vertical Call Spread • 4 Strike in Same Month – Oct 92.00 / 94.00 / 96.00 / 98.00 • Middle 2 Strike = “Body” – 2 ATM Calls/Puts for each Strike of Body • Outside Strikes = “Wings” – 1 OTM Call/Put on each wing • Limited Risk & Limited Reward

Iron Condor • Long Iron Condor – Short Vertical Put Spread • -1 Oct 94.00 / 92.00 Put Spread – Short Vertical Call Spread • -1 Oct 94.00 / 96.00 Call Spread • Short Iron Condor – Long Vertical Put Spread • +1 Oct 94.00 / 92.00 Put Spread – Long Vertical Call Spread • +1 Oct 96.00 / 98.00 Call Spread

Iron Condor • Long Iron Condor • 92 / 94 / 96 / 98 • Net Credit $.75 – Max Profit = Net Credit • $.75 – Max Loss = Diff in Strikes – Net Credit • $1.25 – Upper B/E = Short Call Strike + Net Credit • 98.75 – Lower B/E = Short Put Strike – Net Credit • 91.25

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