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

FX Options Trading 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

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

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 & 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

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

Spot Trading Strangle

Spot Trading Strangle • XDA Sept 84.50/ 87.50 Strangle

Spot Trading Strangle • Identify a trading range for the FX Spot with TA or Other indicators • 1:1 Ratio Allows you to hold a spot position with the low cost hedge – Long AUD/USD and Long 86.00 Put and 88.00 Call – Spot drops to 86.00 of below, you are protected by the Long 86.00 Put – Spot rallies and you sell your long position and short the spot. – Spot continues to rise above 88.00, you are protected by the Long 88.00 Call

Spot Trading Strangle • Identify a trading range for the FX Spot with TA or Other indicators • 2:1 Ratio or More allows you to increase your spot position with the protection of options • Long 10 AUD/USD • Long 20 86.00 Put and 20 88.00 Call – Spot drops to 86.00 or below, you are able to buy up to 10 more FX mini’s – Reducing your average spot cost. – Spot rallies to 88.00 or above, you are able to sell your FX Spot position and continue to hold a long position thru the 88.00Calls.

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 • XDN 90.00 / 93.00 Strangle

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 Long GBP/USD Spot

Weekend Spot Trading XDB • On Monday, with the Spot Up 50 pips, the Puts have lost 30 pips in value – $2.20 - $1.86 = .34

Weekend Spot Trading XDB • On Monday, with the Spot Down 50 pips, the Puts have Gained 16 pips in value. – $2.32 - $2.20 = .12

Weekend Spot Trading XDB • On Monday, with the Spot Down Unchanged, the Puts have Lost 12 pips in value. – $2.20 - $2.08 = .12

Weekend Long USD/JPY Spot

Weekend Spot Trading XDB • On Monday, with the Spot Up 50 pips, the Calls have Gained 26 pips in value $1.58 - $1.33= $.26

Weekend Spot Trading XDB • On Monday, with the Spot Down 50 pips, the Puts have Gained 16 pips in value. – $1.33 - $.99 = .34

Weekend Spot Trading XDB • On Monday, with the Spot Down Unchanged, the Puts have Lost 12 pips in value. – $1.33 - $1.27 = $.06

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

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