Greetings, I have been looking at trading FX Spot Options for a few weeks now and trying to find an Edge. I initially tried buying a Call or Put Option as a means to hedge the downside of a currency trade, with mixed results.
Then I moved on to trading a Covered Call or Covered Put.
This is NZDUSD on the H1 Candle. The red Horizontal Line is the Strike Price for the furthest out of the money Put Option and the Vertical Black Line is its Expiry.
If I sold 70 Lots of this put Option at the strike price represented by the red line I would make £2000 from the upfront premium. Considering a leverage of only 1:50, that would be £2000 on an account balance of £100,000, so 2%.
The Expiry is in 1 weeks time roughly. And I am basically betting that the market will not get down to that strike price (red line) before the option expires (black line). In that case I bank the £2k and that’s it.
I am wondering if selling far out of the money options could be a relatively hassle free way to make regular fixed income from FX trading in a low risk fashion.
Hello I just edited the Original Post so it has the details. I wanted to get your thoughts on selling far out of the money options to get fixed income from trading options, based on where you think the FX Spot price will move over a given window.
You would essentially apply the same technical analysis for a breakout in med-high volatility but then go on to sell an option furthest away in completely the opposite direction to where you think the market will move.
thanks for this…I do not really know much at all about Options, only that it is added risk to the FX risk but if you believe in your strategy then do forward test it. Can it be back-tested on a demo/simulator?
There are not many brokers and no MT4 platform. The best I have so far is a retail facing broker that connects to the CMExchange but their platform only paper trades 2 pairs. Not very retail friendly product, I have a 15 minute delay feed with the CME but I am getting used to that platform otherwise Saxo Trader is the best so far, but I guess I would have to buy data to back test.
Greetings, I did open an account with IG, I can’t remember why I decided not to go with them in the end. I think it might have been because they have too few pairs to work with and I wanted a direct connection to the CME and a bad experience having traded FX Spot with IG before
u don’t need charting in Options, just the ladder of strike prices with the corresponding premiums.
Have you tried this out before, what was your experience: what is this based on.
Hello my friend. Well can’t help you out much here. Haven’t explored options as I simply don’t have the funds. Also I believe hedging is for international investments to protect those funds from currency fluctuations, not for speculating. Best of luck but on the path you have chosen. Let us know how it pans out for you.
Yes it’s low risk. However, it can happen - how much do you lose if it does get to the money ?
Ages since I looked at options, but I remember on the DOW, expiry day was a time we expected manipulation for a few days leading in and a reversion after expiry. It was a valid trading method.
Is Forex options expiry always the second wednesday of the month ?
Interesting to see what happens to price around that time.
Greetings, thank you for the post. I would sell an option like that and at the same time enter a stop/limit order at the same strike price; so if the option goes into the money then I would be in an open position on the underlying, so I would make back, whatever was being lost on the option.
In fact I should make slightly more, if the open FX position is the same lot size as the Option and the option delta is 0.5 or 50% say, then for every £0.50 I lose on the option; I make £1.00 on holding the currency.
The real risk is if the market moves to the strike. Then you enter an order in the underlying to hedge the risk. Then the market moves back up (from the example case above) so that the option is out of the money again, but you are now losing on the currency trade.
Basically if the market hits the strike price for the option and bounces back.
This example is based on Saxo Trader - their Expiry is every seven days on a Wednesday, so you could in theory trade on a weekly cycle. I am not sure about the price movement around expiry (manipulation) I would have to see.
Ok well “they” had to put a LOT of effort into keeping price away from the retail options traders in those days, so I expect it will have a lesser effect on Forex, although I note today’s expiry is approaching. It will be interesting to see what happens @ that time - ie in Five minutes time !! - Thanks for that.
Hey did you take a look at Saxo in the end. You know that the option premium that you get in expressed as a pip value and depends on volatility; the higher the volatility, the higher the premium.
So a GBPUSD Put might be sold for 0.0022 or 22 pips for example and the premium you get would be:
22 pips x PnL1Pip1Lot x LotSize.
So you really want to be buying an option when the volatility and therefore premium is low, and selling an option when the volatility and therefore premium is high. The premium price is derived by the market based on the future volatility ‘Implied’ by the supply and demand dynamics, however there is an intrinsic (real value) volatility that correlates with the implied volatility which is usually the historic volatility over the last 20 trading days annualised.
Anyway I say this because I am writing an indicator that takes the current volatility reading and tells you how many sigmas it is from the average. The idea would be to trigger prospect option sell signals when the current volatility is at a given threshold, say 1 sigma above normal and decreasing. This is where the option price will be highest and the future risk would be decreasing, since future volatility and price movement would be decreasing.
The problem with this is the directional component of the trade. If you think about it, you are trying to sell an option in the opposite direction to market movement as in the example above. The case above is a particularly good example but I think in most cases the volatility is usually higher well into the price move, just about when you are expecting the market to either correct or reverse through the moving average. So a breakout from low volatility, to a correction or reversal where the volatility is now higher.
That means that although the option is more expensive in these areas because of the higher volatility, you have more directional risk. Anyway, all the options in the chain of strike prices increase their premium when the volatility is high, so you could choose to use an indicator to provide signals when the volatility is above 2 sigma from the average volatility over the last 20 trading days for example, when the premiums will be highest.
I suppose what you really want is the combination of high vols, with a situation as in the example when this is due to a sudden rapid price movement in one direction or the other. So you might want to look at the absolute vols and the rate of change of vols.
Hey I just realised that the above approach might be long winded. At the end of the day, if you have to choose between selling when option premiums are higher (high volatility) or guessing the direction right then the latter might be more useful.
If you have a breakout in one direction, you can be more certain of the direction that the market will continue to move in but the option premiums would not be the highest, because breakouts are usually from low volatility periods to higher ones as the breakout creates the volatility.
What might be more useful is trading based on the market direction and also on whether the option premium is trading higher or lower than its intrinsic value from the Black Scholes formula. So to sell you would have relative certainty on the direction, then you would work out the intrinsic option price using black scholes and see if the current option price decided by the market is overpriced or not, sell if it is overpriced.
The best thing about forex is that it lets you to profit with no limits, although making money by trading is an extremely unstable business, so forex isn’t suitable for everyone.
