FX Options Trading Class 4 Gregory McDermott, MApp Fin OU Chief FX - - PowerPoint PPT Presentation

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FX Options Trading Class 4 Gregory McDermott, MApp Fin OU Chief FX - - PowerPoint PPT Presentation

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FX Options Trading Class 4 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

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SLIDE 1

FX Options Trading Class 4

Gregory McDermott, MApp Fin OU Chief FX Strategist

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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.
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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.

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SLIDE 4

Review

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SLIDE 5

Technical Analysis Tools

  • Candlestick Charts
  • Moving Averages
  • Support & Resistance
  • Stochastics
  • RSI
  • Bollinger Bands
  • Fibonacci Retracements
  • Pivot Points
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SLIDE 6

Money Management

  • The Key to becoming a successful

trader is money management.

  • Each trade should be entered with a

profit target and loss limit.

– Adjust your plan to allow profits to run – Never increase your loss limit in hopes of a directional turn in the spot market

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SLIDE 7

Money Management

  • The 2:1 Math

– What % of winning trades must I do to beak even? – 33% or 1 out of 3 trades

  • Example

– 10winner @ $2,000.00 =+$20,000.00 – 20 losers @ -$1,000.00 = -$20,000.00

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SLIDE 8

Money Management

  • The 2:1 Math

– What % of winning trades must I do to beak even? – 33% or 1 out of 3 trades

  • Example

– 10winner @ $2,000.00 =+$20,000.00 – 20 losers @ -$1,000.00 = -$20,000.00

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SLIDE 9

WCO & Spot FX

  • Combine the power of PHLX World Currency

Options with an easy Hedge today.

  • Provides the chance to trade the markets day
  • r night.
  • Carry long option positions with the added

earning power of hedging

  • NOT of perfect hedge
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SLIDE 10

WCO & Spot FX Hedging Pitfalls

  • The options do not settle to hedge spot position
  • Expiration

– Be prepared to roll the options and keep the hedge or CLOSE both sides – Do not let the options expire

  • Margin Implications
  • Math, Math and More Math

– May need to Buy Spot to hedge Long Delta

  • USD/CHF, USD/JPY, USD/CAN

– Calculate & Track Delta by hand with TOS

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SLIDE 11

Gamma Trading

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SLIDE 12

Gamma Basics

  • Delta - Hedge Ratio or Rate of Change

– Percentage Chance an option will expire In the Money

  • Underlying or Hedge = 100
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SLIDE 13

Gamma Basics

  • Delta - Hedge Ratio or Rate of Change
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SLIDE 14

Gamma Basics

  • Gamma – Rate of Change of Delta
  • Based on the Strike
  • All Long Options have Pos Gamma
  • All Short Options have Neg Gamma
  • Positive Gamma provides the
  • pportunity to Sell High and Buy Low

when Currencies move.

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SLIDE 15

Gamma Basics

  • Gamma – Rate of Change of Delta
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SLIDE 16

Gamma Basics

  • Theta – Time Decay
  • The Amount of Value an option loses

each day, all things equal.

  • Based on the Strike
  • Long Options have Neg Theta
  • Short Options have Pos Theta
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SLIDE 17

Gamma Basics

  • Theta – Time Decay
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SLIDE 18

Gamma Basics

  • Gamma Trading comes down to a

simple question……..

–Can I Cover my Decay?

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SLIDE 19

Gamma Basics

  • Straddle = Long (or Short) a Call and a

Put in the Same Month and Strike.

  • Maximum Gamma when straddle is the

ATM Straddle

  • Strangle = Long ( or Short ) an OTM

Call and OTM put in the Same Month

  • Less Gamma but Less Expensive
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SLIDE 20

Gamma Basics

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SLIDE 21

Gamma Basics

  • Gamma Trading has defined concepts
  • Success can be as much art as science

– When to hedge?

  • 200 Delta? 500 Delta? 1000 Delta?

– Should I lean into my gamma? – What day is it?

  • Weekend
  • Holiday
  • Summer
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SLIDE 22

Gamma Basics

  • XDE (GBP/USD)= 148.00
  • GBP/USD Spot
  • +50 148.00 Straddles

Price Gamma Delta Hedge Delta 147.00 1000

  • 1000

+10 Mini Lots 147.50 1000

  • 500

+5 Mini Lots 148.00 1000 148.50 1000 +500

  • 5 Mini Lots

149.00 1000 +1000

  • 10 Mini

Lots

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SLIDE 23

Gamma Basics

  • XDE (GBP/USD)= 148.00
  • GBP/USD Spot
  • +50 148.00 Straddles

Price Delta Hedge Price Profit 147.00

  • 1000

+10 Mini Lots 148.00 1000 pips $1000 147.50

  • 500

+5 Mini Lots 148.00 500 pips $500 148.00 148.00 148.50 +500

  • 5 Mini Lots

148.00 500 pips $500 149.00 +1000

  • 10 Mini Lots

148.00 1000 pips $1000

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SLIDE 24

Gamma Basics

  • XDN (JPY/USD)= 91.00
  • USD/JPY Spot
  • +50 91.00 Straddles

Price Gamma Delta Hedge Delta 90.00 1000

  • 1000
  • 10 Mini

Lots 90.50 1000

  • 500
  • 5 Mini Lots

91.00 1000 91.50 1000 +500 +5 Mini Lots 92.00 1000 +1000 +10 Mini Lots

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SLIDE 25

Gamma Basics

  • XDN (JPY/USD)= 91.00
  • USD/JPY Spot
  • +50 91.00 Straddles

Price Delta Hedge Price Profit 90.00

  • 1000
  • 10 Mini Lots

91.00 1000 pips $1000 90.50

  • 500
  • 5 Mini Lots

91.00 500 pips $500 91.00 91.00 91.50 +500 +5 Mini Lots 91.00 500 pips $500 92.00 +1000 +10 Mini Lots 91.00 1000 pips $1000

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SLIDE 26

WCO Long Gamma Strategy

  • WCO Straddle w/ WCO
  • WCO Straddle w/ FX Spot
  • FX Spot Strangle
  • FX Spot Collar
  • Weekend Spot Protection
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SLIDE 27

WCO Gamma Trading

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SLIDE 28

WCO Long Gamma Trade

  • Purchase Current ATM Straddle
  • Hedge to Delta Neutral using PHLX World

Currency Options

  • Never Net Short Options
  • Take advantage of the natural gaps due to

defined trading hours

  • PBOT Futures also a Hedging Tool for World

Currency Options

  • True Hedge – Both Settle to USD Cash
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SLIDE 29

WCO XDB Example

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SLIDE 30

WCO XDB Straddle

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SLIDE 31

WCO XDB Chart May 5 – June 16, 2008

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SLIDE 32

– Straddle <$15,675.00> – Hedge $22,284.50 – Profit $6609.50

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SLIDE 33

WCO XDE Chart May 5 – June 16, 2008

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SLIDE 34

WCO XDC Chart May 5 – June 16, 2008

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SLIDE 35

WCO XDS Chart May 5 – June 16, 2008

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SLIDE 36

WCO XDN Chart May 5 – June 16, 2008

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SLIDE 37

WCO XDA Chart May 5 – June 16, 2008

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SLIDE 38

WCO Long Gamma Trade Advantages

  • Trade the Hedge “with’ the underlying

FX currency move.

  • Gaps on the opening appear regularly
  • Limit orders can be placed at defined

intervals

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SLIDE 39

WCO & FX Spot Gamma Trading

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SLIDE 40

WCO & Spot FX

  • Delta of Spot/Cash FX is 100 for One (1) $10,000

Contract

  • Option Deltas available on your brokerage platform (

0 – 100)

  • World Currency Options DO NOT Settle to FX Spot
  • Trading to Capitalize on the constant movement of

FX Spot with WCO Protection

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SLIDE 41

WCO & Spot Gamma Trading

Range Approx 86.20 to 88.15 8/20/08 – 8/25/08

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SLIDE 42

Greg’s WCO Spreadsheet

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SLIDE 43

Greg’s WCO Spreadsheet

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SLIDE 44

Greg’s WCO Spreadsheet

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SLIDE 45

Greg’s WCO Spreadsheet

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SLIDE 46

Greg’s WCO Spreadsheet

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SLIDE 47

WCO & Spot Gamma Trading

Symbol Quant Month Profit Price Sold P&L XDA 100 Oct 87.00 $3.29 $3.32 $300.00 XDB 100 Oct 187.00 $5.96 $5.92 ($400.00) XDC 100 Oct 94.50 $4.92 $4.68 ($2400.00) XDE 100 Oct 148.00 $2.82 $2.87 $500.00 XDN 100 Oct 92.00 $3.04 $3.07 $300.00 XDS 100 Oct 92.0 $3.35 $3.21 ($1400.00) Total ($3100.00)

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SLIDE 48

WCO & Spot Gamma Trading

  • FX Spot Gamma Trading Profit
  • $6,217.41
  • ($3,100.00)
  • $3,117.41 Profit Minus Transaction Cost
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SLIDE 49

WCO & Spot FX

  • No Transaction Fees for Spot Gamma Trades
  • Trade on YOUR Schedule ANYWHERE in the World
  • Low Daily Theta / Decay Number for WCO
  • Clearly Defined Trading Parameters
  • Traded a Risk Averse or Aggressive Style
  • Easy Entry and Exit of All Sides of the Trade
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SLIDE 50

Thank You.

Gregory McDermott, MApp Fin OU Chief FX Strategist