Hello Everyone,
I just found out about something called options for currencies. From what I read if you are buying “options” the risk is very minimal. I fully do not understand what they are and how they work. I was hoping someone out there wll be able to provide some more info??? Thanks in Advance
PIP SQUEEK
An option is basically a RIGHT but not an obligation to BUY or SELL an underlying asset(EUR/USD…let’s say) at an agreed price (Strike) within an agreed timeframe.
You could buy or sell the RIGHT to buy EUR/USD at 1.3500 within a 3 month period or you could buy or sell the RIGHT to sell EUR/USD at 1.2900 with 2 weeks.
There are actually 4 permutations and endless number of expirations.
Understanding how it all works will give a trader a very significant edge over everyone else.
EXPERT
Risk is based on several things. The risk in buying options can be quite high.
Better to say that when buying options the amount at risk is strictly defined.
This is not true.
There is no risk involved in buying of options. As a matter of fact, one is SELLING risk with the purchase of an option.
The option underwriter is the person taking your risk in exchange for premium.
EXPERT
EXPERT (are the caps strictly necessary?). True, they are sold as ‘no risk’, but, the risk is quite high - as defined by capital you spend on the premium.
Either way, to the original poster, I would stick with spot trading, but learning about how banks trade options is a good idea.
Then I suggest that you are not familiar with the use of a ratio spread where you not only cover the cost of the premium but in fact get more in return than what you pay for the premium.
Having done your maths correctly with the Deltas, one would end up with a profit irregardless of which direction the market takes.
In my opinion, a zero risk market neutral arbitraged ratio spread is a much better way to make a small certain profit than to have an open ended unlimited risk with a directional spot position.
EXPERT
How do ratio spreads present zero risk? Ratio spreads mean you’ve got to be more short than long, which leaves you exposed to risk on the short side.
Sounds to me like, regardless of the how you’ve calculated the deltas you’re just replacing directional risk with volatility risk?
However, if you’ve found a way of arbing the FX options market successfully, I’m all ears…
This is true only if you do not have an arbitrage in place.
If you understand Delta, you will know this is utter rubbish.
I am sure you would like to know but I am not at liberty to reveal as this is being used as a core strategy right now for an Arbitrage Hedge Fund incubation, so it would not be fair to the Seed Investors to reveal how this is done.
EXPERT
Doesn’t leave much room for discussion then does it? <volatility smiles>
You’re kidding right? If I buy an option for $100 I am most definitely at risk of losing that $100 if the market goes against me. It is defined, not open-ended like the unhedged option seller, but it’s still a risk.
Firstly you are not going to be able to get any options for $100, the spread on options are already way in excess of that.
Secondly you cannot have a risk if you do not have a position. By buying an option, you DO NOT have a position in the market, you have the RIGHT to establish a pre-determined position but you do not have a position.
If you do not have a position, you can never have a situation where the market is against you. If the market cannot go against you, you can never be at risk.
There is a COST involved in buying an option. Nothing is for free. You pay the cost so that you own a RIGHT rather than a position. You end up with an OPTION that carries no risk as opposed to a position that carries with it the FULL and unlimited risk.
Cost and Risk are NOT the same thing.
EXPERT
I’ve done my fair share of options trading. I know how they are priced. That was a random number, as you well know - as you also well know that there are indeed options priced at $100 or less.
Secondly you cannot have a risk if you do not have a position. By buying an option, you DO NOT have a position in the market, you have the RIGHT to establish a pre-determined position but you do not have a position.
To the extent that options rise and fall in value you most definitely have a position by your definition. Maybe you could argue otherwise if you’re planning on holding to expiration or using the options as a hedge, but if you are trading the options with the intent to profit from their price movement then you absolutely have a position and thus a risk.
I can see you are not an options trader.
EXPERT
Don’t mistake my having a different perspective as not knowing what I’m talking about. My experience with options goes back 15+ years. While I do not trade them professionally, I do use them in my stock trading as they provide better risk and position management alternatives than just playing the stock outright - at least for the way I trade.
Stock options and FX options are totally different animals. Even the pricing models are not the same.
Whilst stock options are valued on the Black Scholes Model, FX Options are valued on the Garman-Kohlhagen.
Deltas, Gammas, Vega and Thetas figure more on FX Options and there are not many houses that will offer FX Options, not more than the fingers on one hand.
It is good that you have 15 plus years experience, it is only half of my 30 years involvement.
Again I will say, those that have a full understanding of options will not do spot at all. It is just plain madness to take a gamble when you have got sure money bets to collect. No stress, no eyes glued to the screen.
EXPERT
OK, so you top trump everyone’s knowledge on FX options, but why post here?
That’s not a loaded question - I’m curious.
So what are you doing on this Babypips forum, you hypocrite!! :mad: :mad:
This forum is a place for people new to forex to learn how to trade - spot trade might I add.
As a veteran trader here, I find your arrogance, totally stuck up, self rightous, pompous attitude to be completely reprehensible!! :mad:
If you cannot humble yourself and treat posters here such as Rhodytrader with some respect then I suggest you leave this forum right now and go somewhere else with your disgusting attitude. :mad:
I am sick of trolls, name callers and put downers on this forum.
[B]You are only a newbie here, start by being nice to people.[/B]
Most are learners here, you can help them, but not by being arrogant.
If you are going to post around the forum with post like the ones of yours above, then I can promise you action by the moderators, Pipcrawler and Pipdiddy to eventually ban you.
We simply ask that posters be polite to one another.
[B]Rhodytrader [/B]is an expert at trading by the way.
He does a lot to help beginners on this forum.
Abrupt yes, but not rude Tymen. No need to kick off. Not before the weekend at any rate.
Before this descends into handbags at dawn, Expert - do you know much about banks delta hedging?
Actually, I believe there is a BS extension which covers forex options. Of course as anyone who’s ever looked at the assumptions underlying the BS models knows, they must be taken with a massive grain of salt. Alternately, binomial pricing can be done for any market.
But you’re right. Pricing options on forex is different because of the carry interest aspect.
Deltas, Gammas, Vega and Thetas figure more on FX Options and there are not many houses that will offer FX Options, not more than the fingers on one hand.
Very true. Forex options are not a popular offering - probably in part because the brokers don’t want to have to deal with the complexity of the pricing. Oanda does what they call “boxes”, which are more along the lines of so-called exotics (barriers and touches and such) than plain vanilla.
It is good that you have 15 plus years experience, it is only half of my 30 years involvement.
My point was that I’m not fresh off the turnip truck as you seemed to think.
Again I will say, those that have a full understanding of options will not do spot at all. It is just plain madness to take a gamble when you have got sure money bets to collect. No stress, no eyes glued to the screen.
More correctly: “Those that have a full understanding of options[I], the wherewithall to trade them, and the interest in the type of trading the strategies encapsulate[/I] will not do spot at all.”
Point taken Triphop. 
Claiming 30 years experience, I would just love to put him together with mp6140 and watch the fireworks!! 
:rolleyes: 
However, with experience, then coupled with humility and patience, he could make valuable contributions to the newbies just learning .