FX Options Trading Class 2 Gregory McDermott, MApp Fin OU Chief FX - - PowerPoint PPT Presentation

▶
fx options trading class 2
SMART_READER_LITE
LIVE PREVIEW

FX Options Trading Class 2 Gregory McDermott, MApp Fin OU Chief FX - - PowerPoint PPT Presentation

Jan 08, 2023 128 likes •757 views

FX Options Trading Class 2 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

slide-1
SLIDE 1

FX Options Trading Class 2

Gregory McDermott, MApp Fin OU Chief FX Strategist

slide-2
SLIDE 2
  • 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

  • n this website. The past performance of any trading

system or methodology is not necessarily indicative

  • f future results.
slide-3
SLIDE 3

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.

slide-4
SLIDE 4

Open a Paper Trading Account

  • Think or Swim

–www.optionsuniversity.com/TOS

  • Case Sensitive!
slide-5
SLIDE 5

Review

slide-6
SLIDE 6

Currency Pairs

  • The Exchange Rate of a Currency Pair is the

Number of Units of the Counter Currency that 1 Unit of the Base Currency can purchase.

slide-7
SLIDE 7

Currency Pairs

  • GBP/USD
  • Base Currency
  • 1st Currency in the Pair
  • Currency is Bought
  • Counter Currency
  • 2nd Currency in the Pair
  • Currency is Sold or Borrowed
  • A Currency Pair Always represents a

simultaneous sale and purchase of 2 currencies

slide-8
SLIDE 8

Currency Pairs

  • Example
  • EUR/USD = 1.4750

– What is the Base Currency?

  • EUR

– What is the Counter Currency?

  • USD

– What does this quote tell us?

  • $US 1.4750 = 1.0000 EUR
slide-9
SLIDE 9

Currency Pairs

  • Example
  • USD/CHF = 1.0920

– What is the Base Currency?

  • USD

– What is the Counter Currency?

  • CHF

– What does this quote tell us?

  • 1.0920 CHF = 1.0000 USD
slide-10
SLIDE 10

Currency Pips

  • Contract Sizes

– 100,000 Units of Base Currency

  • A “LOT”
  • 3 lot controls 300,000 base currency

– 10,000 Units of Base Currency

  • Mini Contract or Mini Lot
  • 7 mini-lots control 70,000 base currency
slide-11
SLIDE 11

Currency Pips

  • A “PIP” is the smallest unit of measure for

movement in the FX Market

– Acronym for “Percentage in Point” – Futures Market calls this unit a “Tick” – EUR/USD = 1.4750

  • It’s the last decimal place in the quote
  • EUR/USD = 1.4750
slide-12
SLIDE 12

Currency Pips

  • Value of a PIP

– 100,000 Units of Base Currency

  • Example

– Long 5 USD/CAN = .9950 – USD/CAN = 1.0050 – Profit/Loss ?

  • Profit $CAN 5000.00
  • 5 x $CAN 1000 ( 100 pips @ $CAN 10.000 per)
slide-13
SLIDE 13

Currency Pips

  • Opening Trade USD/CAN

– $US 100,000 exchanged for $CAN 99,500

  • USD/CAN .9950
  • 5 x $CAN 95,000 = $CAN 497,500
  • Closing Trade

– $CAN 100,500 exchanged for $US 100,000

  • USD/CAN = 1.0050
  • 5 x $CAN 100,500= $CAN 502,500
  • Profit

– $CAN 502,500 - $CAN 497,500 = $CAN 5000.00

slide-14
SLIDE 14

Bid / Offer Spreads

  • Financial Two-Sided Markets

– Buyers always bid – Seller always offer

  • Refers to Long/Shorts contracts, not to the

direction needed for profit

slide-15
SLIDE 15

Bid / Offer Spreads

  • Trader Talk

–Bid

  • “Price for Quantity”

– 1.00 Bid for 10 AUD/USD Spot

–Offer

  • “Quantity at Price”

– 10 at 1.00 AUD/USD Spot

slide-16
SLIDE 16

Bid / Offer Spreads

  • What is the Current Bid?

– 1.5677

  • What is the Current Offer?

– 1.5679

  • What price will YOU buy $10,000

EUR/USD? – 1.5679

  • What price will YOU sell $10,000

EUR/USD? – 1.5677

  • How wide is the market?

– 2 pips

slide-17
SLIDE 17

FX Spot Margin

  • Allows a trader to leverage the cash in

their trading account

– Don’t need full cash value of the trade

  • Margin up to 100:1 for 100,000 Unit and

10,000 Unit Trades

  • Leverage must be managed!
slide-18
SLIDE 18

Order Types

  • Market
  • Limit
  • Stop / Stop Loss
  • One Cancels Other / OCO
  • Day Order
  • Good till Cancelled / GTC
  • Good till Close of Market - TOS
slide-19
SLIDE 19

Questions?

slide-20
SLIDE 20

Long calls have a right to buy a currency pair… …short calls have an obligation to sell a currency pair.

slide-21
SLIDE 21

Long Call P&L

slide-22
SLIDE 22

Short Call P&L

slide-23
SLIDE 23

Long puts have the right to sell a currency pair… …short puts have the obligation to buy a currency pair.

slide-24
SLIDE 24

Long Put P&L

slide-25
SLIDE 25

Short Put P&L

slide-26
SLIDE 26

WCO Currency Pairs

  • British Pound/USD – XDB
  • Euro/USD – XDE
  • Canadian Dollar/USD - XDC
  • Australian Dollar/USD – XDA
  • Swiss Franc/USD – XDS
  • Japanese Yen/USD – XDN
slide-27
SLIDE 27

WCO Contract Sizes

  • British Pound – 10,000 GBP
  • Euro – 10,000 EUR
  • Canadian Dollar - 10,000 CAN
  • Australian Dollar – 10,000 AUD
  • Swiss Franc – 10,000 Swiss Francs
  • Japanese Yen – 1,000,000 Yen
slide-28
SLIDE 28

WCO “Right-Sized” for Retail Investors

  • Contract Point Value
  • 100 Basis Point = $100.00
  • 1 Option Contact Priced @ 2.50 cost the

Investor $250.00

  • 1 Option Contract Price Movement of $.01

Equals $1.00

slide-29
SLIDE 29

WCO Contract Sizes

  • British Pound – 10,000 GBP
  • Euro – 10,000 EUR
  • Canadian Dollar - 10,000 CAN
  • Australian Dollar – 10,000 AUD
  • Swiss Franc – 10,000 Swiss Francs
  • Japanese Yen – 1,000,000 Yen
slide-30
SLIDE 30

WCO Expiration Specs

  • European Exercise
  • Expiration Date is the Saturday following the

3rd Friday of the Expiration Cycle.

  • Settlement Value based on the 12:00 Noon

(Eastern) Buying Rate as determined by the NY Fed on the last trading day prior to expiration

  • US Dollar Cash Settlement
slide-31
SLIDE 31

PHLX WCO

  • Trading Hours 9:30am to 4:00pm

(Eastern US Time)

  • Position Limits: 200,000 contracts on

the same side of the market

  • All Trades Issued and Guaranteed by

The Options Clearing Corp ( OCC)

slide-32
SLIDE 32

PBOT World Currency Futures

  • Futures traded as the Underlying to the

PHLX World Currency Options

  • Hedge to WCO Position
  • Also a Stand-alone Trading Instrument
slide-33
SLIDE 33

PBOT World Currency Futures

  • British Pound – 10,000 GBP
  • Euro – 10,000 EUR
  • Canadian Dollar - 10,000 CAN
  • Australian Dollar – 10,000 AUD
  • Swiss Franc – 10,000 Swiss Francs
  • Japanese Yen – 1,000,000 Yen
slide-34
SLIDE 34

PBOT World Currency Futures Symbols

  • British Pound/USD – BP9
  • Euro/USD – EU9
  • Canadian Dollar/USD - CA9
  • Australian Dollar/USD – AD9
  • Swiss Franc/USD – SF9
  • Japanese Yen/USD – JY9
slide-35
SLIDE 35

WCO Recap

  • FX Trading sized for the Retail Investor
  • Trade in a Volatile Market with the

Advantages of Options

  • Open Traditional US Market Hours
  • Trades like a US Index Option
  • Equity options strategies and math work

for the PHLX WCO

slide-36
SLIDE 36

PBOT World Currency Futures

  • Trading Hours 8:20 am to 4:15pm (Eastern US Time)
  • Expiration Date is the Saturday following the 3rd

Friday of the Expiration Cycle.

  • Settlement Value based on the 12:00 Noon (Eastern)

Buying Rate as determined by the NY Fed on the last trading day prior to expiration

  • US Dollar Cash Settlement
  • All Trades Issued and Guaranteed by The Options

Clearing Corp ( OCC)

slide-37
SLIDE 37

Fundamental Analysis

  • What is Fundamental Analysis?

– The study of macroeconomic factors and their effect on the value of a currency

  • Economic
  • Social
  • Political
slide-38
SLIDE 38

Fundamental Analysis

  • US Dollar

– Strong, Active Federal Bank – Dependence on Oil

slide-39
SLIDE 39

Fundamental Analysis

  • Canadian Dollar

– Only Major Currency that is a oil exporter – Represents up to 8% of economy – Central Bank slow to intervene

slide-40
SLIDE 40

Fundamental Analysis

  • Australian Dollar

– Low Household debt – Low Government debt – Abundant Natural Resources

  • Especially precious metals
slide-41
SLIDE 41

Fundamental Analysis

  • Japanese Yen

– Central Bank Aggressive in Policy towards “Cheap” Yen

  • Low Interest Rates
  • Desire to run a Trade Surplus

– Imports nearly 100% of it’s oil

slide-42
SLIDE 42

Fundamental Analysis

  • British Pound

– Active Central Bank – Weakening Housing Market

slide-43
SLIDE 43

Fundamental Analysis

  • Euro

– Central Bank is a group of European Government Banks

slide-44
SLIDE 44

“Cross Rate” Trade

  • A “Cross Rate” is a Currency Pair that

does not include the USD

  • Examples of Active Cross Rates
  • EUR/GBP (Euro to British Pound)
  • EUR/JPY ( Euro to Japanese Yen)
  • GBP/CHF (British Pound to Swiss Franc)
  • AUD/JPY (Australian Dollar to Japanese Yen)
slide-45
SLIDE 45

Cross Rate with PHLX World Currency Options

  • Ability to create a “Synthetic” Cross

Rate Option

  • Buy a Call and a Put in Different

Currencies

– Example:

  • Buy XDE Call and XDB Put in Ratio

– USD Cancels outs – Create Long EUR & Short GBP Position

slide-46
SLIDE 46

Cross Rate with PHLX World Currency Options

  • EUR/GBP Cross
  • EUR/USD 157.00

GBP/USD 198.00 EUR/USD divided by GBP/USD 157.00 / 198.00 = .7929 So it takes .7929 pound to buy 1.00 Euro

slide-47
SLIDE 47

Cross Rate with PHLX World Currency Options

  • AUD/CAN Cross
  • AUD/USD 87.00

CAN/USD 94.00 EUR/USD divided by GBP/USD 87.00 / 94.00 = .9255 So it takes .9255 CAN to buy 1.00 AUD

slide-48
SLIDE 48

Cross Rate with PHLX World Currency Options

  • WCO Ratio Example
  • 10,000 EUR @ 1.5700= $15,700.00
  • 10,000 AUD @ .9600= $9,600.00

– Establish a ratio with approximately the same amount of USD

  • Buy 6 XDE 157 Calls / Buy 10 XDA 96 puts

– Long approx USD $94,200 of EUR – Short approx. USD $96,000 of AUD

slide-49
SLIDE 49

Cross Rate with PHLX World Currency Options

  • WCO Ratio Example
  • 10,000 AUD @ .8700= $8,700.00
  • 10,000 CAN @ .9400= $9,400.00

– Establish a ratio with approximately the same amount of USD

  • Buy 22 XDA 87 Calls / Buy 20 XDC 94 puts

– Long approx USD $191,400 of AUD – Short approx. USD $188,000 of CAN

slide-50
SLIDE 50

WCO Cross Rate Advantages

  • Directional with the built-in risk

management of options

  • Volatility trade
  • Lower cost than owning the cross rate

future

slide-51
SLIDE 51

Interest Rates

  • Exchange Rate of a currency pair is

influenced by the interest rate differential between the two currencies.

  • Market participants may look to

borrower or sell low interest rates

– Yen Carry Trade

slide-52
SLIDE 52

Current Interest Rates

slide-53
SLIDE 53

Forward Rates

  • Dealer Market - between 2 large banks /

financial institutions

  • Exchange rate for 2 currencies.
  • Any amount of currency.
  • Agreed upon date beyond the spot market (

+2 days)

  • The Forward Rate is used to equalize the

interest rate differentials between currencies.

slide-54
SLIDE 54

Futures Rates

  • Standardized Market – Traded on a

Regulated Exchange

  • Exchange rate for 2 currencies.
  • Standardized Currency Contract Amount.
  • Specified Date in the future.
  • The Future Rate is used to equalize the

interest rate differentials between currencies for listed FX Currency Futures.

slide-55
SLIDE 55

Futures & Forwards Calculations

  • Current Spot Rate
  • Interest Rate Differential
  • Time
  • Base Int higher than Counter Rate
  • The Future Rate is used to equalize the

interest rate differentials between currencies for listed FX Currency Futures.

slide-56
SLIDE 56

Futures & Forwards Calculations

  • Base Interest Rate Higher than Counter Rate

– Future Value at a Discount to Spot

slide-57
SLIDE 57

Futures & Forwards Calculations

  • Base Interest Rate Lower than Counter Rate

– Future Value at a Premium to Spot

slide-58
SLIDE 58

The Carry Trade

  • What is the “Carry Trade”

– Borrow the low cost currency

  • Low Interest Rates

– Convert the low cost currency to a high yielding currency – Invest the funds

  • Bank Deposits
  • Stocks / Bonds
  • Real Estate
  • Derivatives

– “The Hedge Fund Builder”

slide-59
SLIDE 59

The Carry Trade

  • The Derivatives Effect

– Leveraged use of funds from carry trade can stress world markets – Global Derivatives Market id 7.8 times more than Global GDP* – 25 years ago Global GDP was 5 times Global Derivatives Market*

  • *Statistics from PHLX WCO Webinar
slide-60
SLIDE 60

The Carry Trade

  • The Potential Hazards

– Currency values possibly distorted

  • Fundamentals vs Price

– The Un-Wind Effect

  • Commodities prices fall
  • Bank of Japan / Swiss Raise rates
  • China’s consumer and commodity demand falls
slide-61
SLIDE 61

Thank You.

Gregory McDermott, MApp Fin OU Chief FX Strategist

gmcdermott@optionsuniversity.com