FX Options Trading Class 7 Gregory McDermott, MApp Fin OU Chief FX - - PowerPoint PPT Presentation

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FX Options Trading Class 7 Gregory McDermott, MApp Fin OU Chief FX - - PowerPoint PPT Presentation

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FX Options Trading Class 7 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 7

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

FX Spot Straddle Review

  • Long 100 Straddles for 6 WCO Pairs

– Aug 20-25 – Aug 25-Aug 29 – WCO Losses ($6500) – FX Spot Profit $ 12,236.26 – Trade Profit $5736.26

  • Straddle Trade is not a Directional Trade
  • Easy to exit and Re-Establish
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SLIDE 6

FX Spot Trading Strangle

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SLIDE 7

Spot Trading Strangle

  • Purchase Front Month Puts & Calls based on

Your Risk Profile – Tight Strangle - 50 pips up and down – Moderate Strangle – 100 pips up and down

  • Coordinate the Strangle strike to know

support and resistance levels

  • Options Ratio minimum of 1:1

– Could Increase Ratio to allow targeted buying or selling

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SLIDE 8

FX Spot Trading Collar

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SLIDE 9

Spot Trading Collar

  • Long / Short FX Spot Position
  • Buy Near-Term Puts & Sell Near-Term Calls around

your Spot Position

  • Coordinate the Collar’s strikes to known support and

resistance levels

  • Exit strategy based on your price levels
  • Options Ratio minimum of 1:1
  • Higher ratio would allow you to increase your position

through options in the opposite direction.

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SLIDE 10

Spot Trading Collar

  • Collar Cost

– Pay $.43 for XDN Sept 90.00 Puts – Sell XDN Sept 93.00 Calls @ $.55 – $.12 Credit

  • Profit - Sell out our long position @ $93.12 until

September Expiration

  • Stop-Loss – Sells out our long position @ $90.12

until September Expiration

  • Options can be rolled only to lock-in profits. Moving

the stop-loss put eliminate the value of options.

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SLIDE 11

Weekend FX Spot Trading

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SLIDE 12

Weekend Spot Trading

  • Own or initiate a Spot position that you

would like to carry over a weekend.

  • Stop or Stop Loss Orders DO NOT

protect you while the FX Market is Closed .

  • Buy a Protective Put or Call to “Insure”

your Spot Position

– 1:1 Ratio – 1 WCO for each FX Mini Lot

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SLIDE 13

Weekend Spot Trading

  • Options not the focus of the trade
  • Inexpensive way to protect a spot trade
  • Initiate a Weekend “Event Trade”

– Weekend OPEC Meeting – G8 Summit

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SLIDE 14

WCO

“Futures Replacement”

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SLIDE 15

WCO Futures “Replacement”

  • Purchase an ITM Call (Put) to Initiate a

Long (Short) Currency Position vs USD.

  • Directional Trade
  • Limited Risk
  • Allows for a Longer Term Time Horizon
  • Can minimize the effect of short-term market

swings

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SLIDE 16

WCO XDE Example

  • Purchase 10 XDE July 153.00 Call
  • $3550 (Debit)
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SLIDE 17

WCO XDE Example

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WCO XDE Example

  • Purchase 10 XDE June 153.00 Call
  • $3550 (Debit)
  • Sell 10 XDE June 153.00 Call & Purchase 10

XDE June 156.00 Call

  • $5600.00 (Credit) - $3650.00 (Debit) =

$1950.00 (Credit)

  • Now Own 10 XDE June 156.00 for $1.60
  • $3550 - $1950= $1600.00
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SLIDE 19

WCO XDB Example

  • Purchase 10 XDB Nov 177.00 Call
  • $6335 (Debit)
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SLIDE 20

WCO XDB Example

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WCO XDB Example

  • 8/29/08 Purchase 10 XDB Nov 177.00 Call
  • XDB Closes @ 182.32
  • $6550 (Debit)
  • 9/2/08 XDB Closes @ 178.20

– XDB Nov 177 Calls $3.70 / $3.85

  • Protection of Option in effect while futures market

closed

  • Allowed you chance to be wrong, not blown out.
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SLIDE 22

WCO Futures “Replacement” Advantages

  • Directional Trade
  • Limited Risk
  • Allows for a Longer Term Time Horizon
  • Can minimize the effect of short-term

market swings

  • Allows you to Lock-In Profit while still

maintaining the same position size.

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SLIDE 23

WCO Covered Calls

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SLIDE 24

Covered Calls - WCO

  • Long a Deep in the Money Long Term Call

Option or Underlying Future

  • Sell Front Month ATM or OTM Call to collect

Premium in a 1:1 Ratio

  • Strategy is design for trader who wants to be

long the underlying pair as a long-term investment.

  • Collected Option Premiums help reduce the

cost of the underlying

  • UNLIMITED RISK
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SLIDE 25

Covered Calls

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SLIDE 26

Covered Calls XDE March

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SLIDE 27

Covered Calls XDE March

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SLIDE 28

Covered Calls XDE March

  • Buy 10 XDE March 137.00 Calls for $9.35

– $9350.00 Debit

  • Sell 10 XDE Sep 148.50 @ $.70

– $700.00 Credit

  • Sell following months as front expires

– 6 months @ $700.00 = $4200.00

  • Net Cost of the XDE March 137.00 Calls when March

becomes the front month now $5.15 or $5150.00

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Covered Calls - Spot

  • Long Spot FX
  • Sell Front Month OTM Call to collect

Premium in a 1:1 Ratio

  • Buy-Rite – Initiated for a short term

premium and target exit

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SLIDE 30

XDB Buy – Rite

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SLIDE 31

XDB Buy – Rite

  • Buy 10 XDB FX Spot 1.8395
  • Sell 10 XDB Sep 186.00 @ $.88

– $880.00 Credit

  • Looking for a spot appreciation with a targeted exit

point.

  • Effectively selling the Spot @ 1.8688
  • UNLIMITED RISK
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SLIDE 32

Covered Calls

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SLIDE 33

WCO Covered Puts

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SLIDE 34

Covered Puts - WCO

  • Long a Deep in the Money Long Term Put

Option or Underlying Future

  • Sell Front Month ATM or OTM Put to collect

Premium in a 1:1 Ratio

  • Strategy is design for trader who wants to be

short the underlying pair as a long-term investment.

  • Collected Option Premiums help reduce the

cost of the underlying

  • UNLIMITED RISK
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SLIDE 35

Covered Put P&L

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SLIDE 36

Covered Puts XDS March

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SLIDE 37

Covered Puts XDS March

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SLIDE 38

Covered Put

  • Buy 10 XDS March 99.00 Puts for $8.89

– $8,900.00 Debit

  • Sell 10 XDS Sep 88.50 Puts @ $.21

– $210.00 Credit

  • Sell following months as front expires

– 6 months @ $210.00 = $1260.00

  • Net Cost of the XDS March 99.00 Puts when March

becomes the front month now $7.63 or $7630.00

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SLIDE 39

Covered Puts - Spot

  • Short Spot FX
  • Sell Front Month OTM Put to collect

Premium in a 1:1 Ratio

  • Sell-Rite – Initiated for a short term

premium and target exit

  • UNLIMITED RISK
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SLIDE 40

Covered Put P& L

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SLIDE 41

XDA Sell - Rite

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SLIDE 42

XDA Sell - Rite

  • Sell 10 AUD/USD FX Spot .8559
  • Sell 10 XDA Sep 83.50 Puts @ $.57

– $570.00 Credit

  • Looking for a spot appreciation with a targeted exit

point.

  • Effectively buying the Spot @ .8502
  • UNLIMITED RISK
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SLIDE 43

Covered Call& Puts

  • UNLIMITED RISK
  • Synthetic Short Put or Short Call
  • Risk return must be considered prior to

initiating your position

– How much can I make and at what Risk?

  • Premium Collection Strategies perform best

in sideways or range-bound markets.

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SLIDE 44

WCO Vertical Spreads

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SLIDE 45

WCO Vertical Spread

  • Vertical spreads are either Call or Put
  • Simultaneous purchase and sale of calls/puts in the

same month

  • Buying or selling the spread refers to premium

payment (buying) or collection (selling)

  • Spreads should always priced between Zero and the

Distance between the strikes.

  • Directional Trade
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SLIDE 46

WCO Vertical Spread

  • Limited Risk for the Buyer and Seller

– Buyer’s loss limited to the price paid for the spread – Seller’s loss limited to the max value of the spread minus premium collected

  • Unique feature for seller
  • Limited Profit Potential

– Buyer’s profits is limited to the max value of the spread minus premium paid. – Seller’s profit limited to premium collected selling the spread

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SLIDE 47

XDE Vertical Call Spread

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SLIDE 48

XDE Vertical Call Spread

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SLIDE 49

XDE Vertical Call Spread

  • XDE Sept 145.00 / 146.50 Call

– Pay $.69 for 10

  • $690 Debit

– Max Value @ Expiration $1.50

– Max Profit for 10 Lot

  • $1.50 - $.69 = $.81
  • $.81 x 10 = $810.00

– Max Loss $690.00 – Break-Even Point 145.69

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SLIDE 50

XDC Vertical Put Spread

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SLIDE 51

XDC Vertical Put Spread

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SLIDE 52

XDC Vertical Put Spread

  • XDC Oct 93.50 / 91.50 Put

– Sell 10 @ $.67

  • $670.00 Credit

– Max Value @ Expiration $2.00

– Max Profit for 10 Lot @ 93.50 or higher

  • Spread expires worthless
  • Keep $670 Premium collect on sale

– Max Loss $1,330.00 ($2.00 - $.67 = $1.33) – Break-Even Point 92.83

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SLIDE 53

WCO Vertical Spread Exit

  • Hold the long or short position until expiration

– Do Nothing

  • Close position with counter transaction

– Long Spread = Sell Spread – Short Spread = Buy Spread

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SLIDE 54

WCO Vertical Spread Exit

  • “Leg Out” of the Spread

– Buy or Sell one of the two options in your spread – Should NEVER leave a Net Short Option Position

  • Roll Profitable Trade

– Move you winning trade up/down – Initiate a new position and close your previous position

  • Both trades done at the same time
  • Do Not Try to “Leg” this Trade!
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SLIDE 55

Greg’s WCO Vertical Spread

  • How I would use a Vertical Spread Today

Sept 2, 2008?

  • Buy XDB Oct 178/182 Call Spread

– Pay $1.50 for $4.00 Call Spread with 45 Days to Expiration – A Value Play

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SLIDE 56

Thank You.

Gregory McDermott, MApp Fin OU Chief FX Strategist