Oh which one. I am testing 2 at the moment. I am looking at the Carry - still not enough results. and trading with options. I am learning a great deal more about how they work and how to combine them with trade in the underlying currency pair. Starting with Covered Calls and Covered Puts.
So far seems okay, unfortunately I don’t have any potential trades to demonstrate with. I am looking for a new options broker to buy and sell on the central exchange.
Does does appear to be an edge from trading this way, the main way that is introduced from what I gather so far is that the risk rewards for the trade change to more favourable ones; a 1:1 becomes a 1:2 etc…whereas the probability of wining or losing stays essentially the same as simply trading the spot.
2 things to consider would be
- Limited upside potential
- the event that the market does a whipsaw.
If sell get in short on the spot fx and sell a put option lower down, you are paid a premium. If the market goes down then great, you profit from the market movement in the spot (upto the strike price of the option) and also benefit from the premium. That could be say £5k for the spot move and £1.5k for the premium = £6.5k.
If on the other hand the spot trade is wrong and market hits your stop loss on the spot trade, then you would lose -£5k + £1.5k = -£3.5k. But probability of doing either assuming a random market and no edge is 50:50. The assumption in this case is that the market moves against you an does not recover before the expiry of the option - so that the option expires out of the money and has no value for whomever bought it.
If however - the market moves up to knock out your spot trade, then moves back down again to bring the option into the money - then problems. You are now losing money on the option with no reciprocal profit on the spot, the only way u can counter that is to get in on another short position on the spot, so that you are losing money on the option but making the same (usually making more depending on the option delta) on the spot. It is the risk of that eventuality that you really need to consider to determine if there is sustainable edge in the trade or not, in the first 2 cases there is clearly edge.