Currency "OPTIONS"

Trading Discussion
81

Wow…

You managed to get into some very complicated maths which would make it more complicated the further you proceed.

I will just simplify it but firstly…What is a net positive delta position ?? You need to explain that term to me before I can answer you on that.

Ok. Understand this…this is not a perfectly hedged position, there is a ratio of 2 : 3 in the hedge so there is a leak as the market moves down past the 1.29 level but this is not a dramatic situation and easily mitigated so it is not an issue but know that action is required as the market moves that way, if it does. Remember we act according to what the market dictates so we do not predict if it will go there, we wait for it to go there before we action anything. If it does not, no action needed then. If it does, we do something, no drama.

Another thing, we DO NOT have to hold the options till expiration. Sometimes we may want to but we do not HAVE to.

The easiest way to cut out all the mind boggling maths is to use expiration scenarios. We can do the maths for present time situation and the maths for expiration scenarios and then we know the two limits and between now and expiration, all situations will only be between these two limits.

Agreed ?

You are comfortable with the upside scenario so we leave that out and just focus on the downside scenarios.

Let’s take 3 points where the market could be at expiration and do the maths for those 3 points…the rest can then be easily extrapolated from those 3 points.

Point 1 Market at option expiration is 1.2950
Point 2 Market at option expiration is 1.2900
Point 3 Market at option expiration is 1.2850

Point 1. Market at 1.2950

Spot is short at 1.2952
Long CALL at 1.2900 exercised
Short PUT at 1.2900 expires.

Cash balance is $104,000
Spot at 1.2952 is set off against CALL exercised at 1.2900 for profit of 52 pips $ 5200.00

Cash balance now $104,000 plus $5200 = $109,200

Short PUT expires at 1.2900 so $0

New cash balance $109,200
Zero positions.

Point 2. Market at 1.2900

Spot is short at 1.2952
Long CALL at 1.2900 expires.
Short PUT at 1.2900 expires.

Cash balance is $104,000
Spot at 1.2952 is current with 52 pips profit. This needs to be liquidated to set off and null positioned. Profit 52 pips = $5200

Cash balance now $104,000 plus $5200 = $109,200

Long CALL expires at 1.2900 so $0
Short PUT expires at 1.2900 so $0

New cash balance $109,200
Zero positions.

Point 3. Market at 1.2850

Spot is short at 1.2952
Long CALL at 1.2900 expires.
Short PUT at 1.2900 exercised.

Cash balance is $104,000
Spot at 1.2952 is set off against PUT at 1.2900 for a profit of 52 pips. $5200 profit. 500,000 remnant of 1.2900 PUT is current and needs to be set off for a 50 pips loss so - $2500

Cash balance now $104,000 plus $5200 = $109,200 - $2500 = $106,700

New cash balance $106,700
Zero positions.

You might agree this is an easier way to visualise it.

EXPERT

82

Anywhere above 1.2716

See if you could work out that maths.

EXPERT

83

For the benefit of those still trying to figure out why from 1.2716 and above, here is the maths.

Current situation.

Cash balance $104,000
Short EUR/USD 1.2952 size 1,000,000
Long CALL 1.2900 size 1,000,000
Short PUT 1.2900 size 1,500,000

If market at expiration is 1.2716

Short EUR/USD is set off by 1,000,000 of 1.2900 PUT exercise with 500,000 remnant. This is 52 pips profit = $5200

Long CALL expires. Value = $0

Remnant 500,000 current to be set off by buying in 500,000 EUR/USD at 1.2716 Loss of 184 pips@500,000 = $9200

New Cash balance is $104,000 + $5200 - $9200 = $100,000 which was our start point.

EXPERT

84

Just an update here.

The position has remained the same, nothing has change and the market is pretty much where it is…consolidating, ranging…call it what you like by whatever term but the market does this whenever it feels like doing it.

You will note that the account value has crept up a bit, so we pocket a bit more just like what I term…we wait and get paid !!

If the market consolidates like this for 2 more days, we will make for 2 more days.

EXPERT

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85

I just realised that there could be some here probably just struggling to comprehend what a CALL or a PUT might be.

How it could be used and why.

I will be putting together some of these basic information in a file and offer it for download.

It would take a bit of time to compile it but I will announce it once I have managed to get it together. It would be good basic information.

If you want to be kept informed on this, just send me an email and I will keep you informed.

EXPERT

86

The market is still very much moving sideways but we are collecting some profits slowly but surely.

Account value has crept up just a little bit more.

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87

It has happened. We are at the wrong side of the market.

When we went into the trade initially, we were slanted towards the EUR/USD going down and it did for a little. Enough for us to lock in a small profit.

Well now it has reversed and went strong against us. Let’s look at what our account looks like at this stage.

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Instead of having a loss, our account value has GONE UP instead !!

As a matter of fact, it has gone enough for us to consider locking in a profit here and waiting for the market to deliver YET AGAIN.

I will do that and then come back with a screenshot of the after effect…stay tuned !!!

EXPERT

88

Oh No !!!

If I delayed for just 2 secs, I could have got a very much better price !!..The market shot up just after I liquidated the 1.2900 PUT of 1,500,000

I could have had more !!..Ah well…such is life !!!

Here is the screen and if anyone hasn’t figure it out yet…YES I am trading it LIVE… a DEMO account but the trades are LIVE…real time.

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Now if you check it carefully you will find that the 1,500,00 1.2900 PUT was sold at 190 pips and bought at 161 pips. Do your calculations and you will see $4350 profit !!

Now we are square on the PUT.

We wait again for the market to deliver as it ALWAYS will.

The market NEVER fails to deliver, it is always US that fail to appreciate.

EXPERT

89

This is getting to be a bit exciting. The market seems to be insisting on giving us another window of opportunity. I could be doing a trade again.

First lets look at where we are.

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Our account value is up again at $99,510 and it looks like I will be doing another trade soon. Stay tuned.

EXPERT

90

Big bold trade now. This will allow me to sit back and relax for quite a few days maybe.

Sell 4.000.000 1.2500 PUT 22nd June

We can leave that for a few days now… wait and get paid.

The bid/ask spread took a big chunk out so our account value now stands at $92,800 but we know that will come back up just as a matter of time.

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Those wanting personal coaching, please contact me by email.

EXPERT

91

Expert, all good but where’s the risk? In the past few trades, where does the risk lie - ie what would have to happen for you to lose money?

92

Ok great… the way you put it makes more sense… thanks!

A couple more quick questions,

You just shorted 4 put contracts, 1M EUR/USD each at 1.25 strike. That’s a little over $40k in premium, why hasn’t it posted to your cash balance?

Also, Saxobank will let you short more Puts than what you have open in spot? In your trade, only one of your short puts is covered by that short 1M EUR/USD spot positions. That leaves you with 3 naked puts and a whole lot of risk…

By my calculations, after your adjustment, you trade would start losing money if EUR/USD fell below 1.22… am I correct?

Last question? How is the liquidity in the Saxo FX Options market? Are you able to open and close trades right away? I know options aren’t as liquid as spot forex, so I’m wondering how easy it is to get in and out of positions if it went against me. Thanks!

93

Good morning. It is just past 7 am in the morning here and I just got up a short while back.

First off an update on the result. Remember we wait and get paid ??

Well the market NEVER fails to deliver !!

Here is a snapshot first and I will have a coffee and answer your posts a little later.

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Well, the account value has gone UP to $94,500 as expected that the market will continue to feed us. This against $92,800 when I went to bed. So the market has given $1,700 while I slept.

It is great to have the market on your side ALL of the time rather than having to fight it every moment.

EXPERT

94

TRIPHOP, if you go back down the thread a bit you will find a trade where I indicated that the profitability was anywhere above 1.2716

I will quote the post below. This also means that the RISK starts at that point. Below 1.2716 is when the position STARTS to lose.

These are NOT zero risk trades, they are low risks trades. ZERO risk trades would require an establishment of an arbitrage to diffuse the risky portion.

I won’t go into the risk management aspect of it here, I will do that one on one as each person views and handles risk differently.

So there are risks here on these trades but they are low and can be handled easily and we don’t want to do anything about it until the market indicates to us that we should. We just take our cue from the market.

EXPERT

95

It has been posted but it is not very obvious, there is a reason for this and on this I will explain one on one because the answer will raise MORE questions.

Remember I mentioned that a mindset change IS REQUIRED…each person views it differently, have their own different hangups and if I went through the explanation here, 5 more will have 5 questions each and that would mean 25 more explanations I need to do just right off.

YES, it is not an issue as long as your margin is well managed.

There is a risk. These are not risk free trades. It is not a whole lot, it is not naked. There is a mechanism that covers it to a point where action would then be needed. The point is far away, comfortable and the needed action is easily done if needed.

No. But you have got the gist of it and a careful recalculation would provide you with the correct answer. It would be closer to 1.2400

Liquidity is not an issue unless you are trading in size above $20m. Even then it is not an issue, just that you would require a dealer quote.

I hope you will understand that some questions I will answer only in private and not on the open forum not because of anything else except that my answer will trigger off tons of questions. It will only happen that way. It would then make it impossible to answer all at once and create an information bottleneck.

EXPERT

96

An update on the account and this is going to sound like a broken record but often this is exactly what is needed… to keep on stating an obvious point until it sinks in and a mindset is formed by observation of the obvious.

The market has delivered AGAIN… It NEVER fails to deliver !!

If anything, it is because we FAIL to accept what the market gives with open arms !!

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EXPERT

97

TRIPHOP, if you remember some time back down this thread I mentioned about not revealing the strategy as it would be used as a core strategy for an Arbitrage Hedge Fund.

What I have shown here is nowhere near what is being done where that strategy is concerned.

I am still in the process of seeking out Seed investors and have 5 interested parties at present. I could place a link to my fund raising site but the moderators here will probably just delete it anyway so I’ll just paste it here.

The purpose is to have a permanent record here so that if the Seed investors do happen to come across this site, it will be on record that the strategy has never been revealed and it’s integrity is still very much intact.

A secondary purpose would also be that there is a very slim chance that there may arise from here an investor that might have enough interest to carry it through too.

Once my Hedge Fund gets along the way, I would need to have a few dedicated traders to allocate to but first they must be able to understand and work options very well.

I know you have indicated that you have no interest in trading options and do only spot, but it does seem that FXDUDE has the potential to be developed into a good options trader. He does have the big picture of the concept and it is just a matter of getting down to the specifics.

Below is my Project Funding request from an Angel Investor site, it is still current. I have not narrowed down the potential Angels yet.

I shall not be making much postings from now except an update of the demo account, maybe once every 3 or 4 days till it time expires on that.

[I]An options arbitrage strategy developed over the past 30 years is now ready for development into a core Strategy for an Arbitrage Hedge Fund. Investors sought for initial seed funding for incubation and developing a track record.[/I]

Capital is being sought for development and incubation of a track record for a sound Options Arbitrage Strategy. Incubation timeframe is 6 months to a year and mainstream sourcing of Investment Capital can begin when track record of 3 months old can be formed.

Initial seeding capital is not used for investment returns as investment capital will be sought only after a track record of the strategy has been formed and investment capital can be sought by private placements from Fund of funds and prime brokers.

The working capital sought is only for the purpose of incubation and will be repaid from the 6th to 12th month as the track record would be in place and investment funds are expected then to be raised.

Seed investors providing funds for the incubation will be provided with 10% return on their funds within a 6 month to a year timeframe and a right to first refusal to private placements on the Arbitrage Hedge Fund created.

Seed investors will have a preferential fee discount of 20% for any placements they decide to have in the Fund.

Anticipated fees for the Fund are 2% annual management fees and a 30% performance fee on sharing of profits.

The Strategy was developed over extensive research and testing in the past 30 years. It is a sound Market Neutral approach and based on mathematical dissection containing almost zero predictive analysis.

The anticipated profit is targeted at 2% per month and the drawdown does not exceed 5%. This is inherent in the Market Neutral and Arbitraged approach that it takes.

The trading risks parameters are very wide in that small, medium and large market swings and volatility does not have a significant impact and ONLY very very large movements will present a risk which can be mitigated without much drama or urgency.

The Strategy presents a very good utility as a core strategy for Hedge Fund management and can match and exceed what is provide for in today’s market.

It is anticipated that, properly developed and presented, this Hedge Fund thus created will compete well and likely corner a big share of the Hedge Fund market.

Funds raised in this exercise will be used mainly for formation of the Hedge Fund Entity and incubation of the trading track record.

Marketing of the Hedge Fund will begin when a track record of at least 3 months has been formed and redemption of the debt created by this exercise will start from the 6th month.

Equity participation is not sought for and it is not envisaged that it will ever be but in the event that an equity participation will be called for, Seed investors from this exercise will have the privilege of first call.

AMOUNT REQUESTED: $5,000,000
MINIMUM INVESTMENT AMOUNT: $500,000
INVESTMENT REASON: Working Capital
REGION: Singapore

I wish you all the best in your trades and may the MARKET ALWAYS provide you all the fortunes and freedom you seek !!!

EXPERT

98

Sheesh… I just hate it when the market makes a fool out of me !!

I had seen the account value go down and was thinking it would be at least 2 to 3 days before I could post.

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Again and again the market has proved me wrong. It will always go opposite to what I predict. I wonder…does anyone else find this to be the case?

Account value now $95,930

Hmmm…itching to hit the market again…should I ??

EXPERT

99

If I am going to be in for the penny, I might as well be in for the pound !!

Entering the market again…screenshots to follow…

Short 1,000,000 EUR/USD
Long 1,000,000 1.2900 CALL

Now we wait for market to deliver the goods.

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EXPERT

100

The market has given us an opportunity yet again and I will be going in to sell 4,000,000 of the 1,25 PUT

Standby for for screenshot that will follow soon.

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Big chunk lost out again due to the bid/ask spread but again we will get it back in due course and more.

EXPERT