FX Options Trading Class 8 Gregory McDermott, MApp Fin OU Chief FX - - PowerPoint PPT Presentation

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FX Options Trading Class 8 Gregory McDermott, MApp Fin OU Chief FX - - PowerPoint PPT Presentation

Oct 04, 2023 532 likes •1.03k views

FX Options Trading Class 8 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 8

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

WCO

“Futures Replacement”

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SLIDE 6

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 7

WCO Covered Calls

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SLIDE 8

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 9

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

  • UNLIMITED RISK
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SLIDE 10

WCO Covered Puts

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SLIDE 11

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 12

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 13

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 14

WCO Vertical Spreads

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SLIDE 15

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 16

WCO Calender Spreads

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SLIDE 17

Calendar Spreads

  • Purchase and Sale of Options in

Different Expiration Months

– Time Spread or Horizontal Spread

  • Options can be on Different Strikes
  • Spreads can be structured as premium

collection, a volatility play or delta neutral using options in ratio

  • Be Aware of your Net Option Position
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SLIDE 18

Calendar Spreads

  • Buy XDS Sept / Oct 90.50 Call Spread

– Buy 10 Oct 90.50 Calls ($1.53) – Sell 10 Sept 90.50 Calls ($.98)

  • Collect $.55 Premium as the Front Month

Option Decays

  • Reduce the cost of owning the Out Month

Option

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SLIDE 19

Calendar Spreads

  • Sell XDE Sept / Oct 145.00

– 1:2 Put Spread

– Sell 10 Oct 145.00 Put ( $2.34) – Buy 20 Sept 145.00 Puts ($1.47 ea) – $.60 Debit

  • Finance the Front Month Puts
  • Acquire a Short Delta & Long Gamma
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SLIDE 20

WCO Synthetic Positions

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SLIDE 21

Synthetic Positions

  • Long Put=Short Future +Long Call

– Month and Strike of the Call Must Be the Same as the Put you are trying to “create”

– P&L replicates the Long Put P&L – May be a more efficient way to own WCO Puts – Algebra to calculate other Synthetics P&L

  • Synthetic Futures Pricing**

– Futures $= Call$ - Put$ + Exercise$ +Carry Cost – Futures$ = 4.55-1.35+100.00 +.15 – Futures$ = 103.35

  • ** Options Volatilty & Pricing, Natenberg, Page 221
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SLIDE 22

Synthetic Positions

  • Call – Put = Underlying (Future /

Stock)

– Simple equation allows you to identify ways to construct similar P&L

  • Profit and Risk potential

– Recognize the effect of adding or subtracting form your position

  • Positive and Negative
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SLIDE 23

WCO Butterflies

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SLIDE 24

Butterfly

  • 4 Options Spread

– All Calls or All Puts

  • 3 Equidistant Strike in Same Month

– Oct 92.00 / 94.00 / 96.00

  • Middle Strike = “Body”

– 2 ATM Calls / Puts

  • Outside Strikes = “Wings”

– 1 OTM Call / OTM Put on each wing

  • Limited Risk & Limited Reward
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Butterfly

  • Long Butterfly

– Long the “Wings”

  • +1 Oct 92.00 C/P & +1 Oct 96.00 C/P

– Short the “Body”

  • -2 Oct 94.00 C/P
  • Short Butterfly

– Short the “Wings”

  • -1 Oct 92.00 C/P & -1 Oct 96.00 C/P

– Long the “Body”

  • +2 Oct 94.00 C/P
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SLIDE 26
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SLIDE 27
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Butterfly

  • Long Put Butterfly
  • 90 / 94 / 98
  • Net Credit $1.00

– Max Profit = Net Credit / Pin @ Short Strike

  • $1.00

– Max Loss = Diff in Strikes – Net Credit

  • $3.00

– Upper B/E = Short Put Strike - Net Credit

  • 97.00

– Lower B/E = Short Put Strike + Net Credit

  • 91.00
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SLIDE 29

WCO Iron Butterflies

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SLIDE 30

Iron Butterfly

  • 4 Options Spread

– Vertical Put Spread and Call Spread – Straddle vs. Strangle

  • 3 Strike in Same Month

– Oct 92.00 / 94.00 / 96.00

  • Middle 2 Strike = “Body”

– 1 ATM Call & 1 ATM Put for each Strike of Body

  • Outside Strikes = “Wings”

– 1 OTM Call / OTM Put on each wing

  • Limited Risk & Limited Reward
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SLIDE 31

Iron Butterfly

  • Long Iron Butterfly

– Long the “Wings”

  • +1 Oct 92.00 Put & +1 Oct 96.00 Call

– Short the “Body”

  • -1 Oct 94.00 Put & -1 Oct 94.00 Call
  • Short Iron Butterfly

– Short the “Wings”

  • -1 Oct 92.00 Put & -1 Oct 96.00 Call

– Long the “Body”

  • +1 Oct 94.00 Put & +1 Oct 94.00 Call
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SLIDE 32

Iron Butterfly

  • Long Iron Butterfly
  • 90 / 94 / 98
  • Net Credit $1.50

– Max Profit = Net Credit

  • $1.50

– Max Loss = Diff in Strikes – Net Credit

  • $2.50

– Upper B/E = Short Call Strike + Net Credit

  • 99.50

– Lower B/E = Short Put Strike – Net Credit

  • 88.50
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SLIDE 33

WCO Condors

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SLIDE 34

Condor

  • 4 Options Spread

– All Calls or All Puts

  • 4 Strike in Same Month

– Oct 92.00 / 94.00 / 96.00 / 98.00

  • Middle 2 Strike = “Body”

– 2 ATM Calls/Puts for each Strike of Body

  • Outside Strikes = “Wings”

– 1 OTM Call/Put on each wing

  • Limited Risk & Limited Reward
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SLIDE 35

Condor

  • Long Condor

– Long the “Wings”

  • +1 Oct 92.00 C/P & +1 Oct 98.00 C/P

– Short the “Body”

  • -1 Oct 94.00 C/P & -1 Oct 96.00 C/P
  • Short Condor

– Short the “Wings”

  • -1 Oct 92.00 C/P & -1 Oct 98.00 C/P

– Long the “Body”

  • +1 Oct 94.00 C/P & +1 Oct 96.00 C/P
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SLIDE 36
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SLIDE 37
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SLIDE 38

Condor

  • Long Call Condor
  • 92 / 94 / 96 / 98
  • Net Credit $.60

– Max Profit = Net Credit / Between The Strikes

  • $.60

– Max Loss = Diff in Strikes – Net Credit

  • $1.40

– Upper B/E = Short Call Strike - Net Credit

  • 97.40

– Lower B/E = Short Put Strike + Net Credit

  • 92.60
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SLIDE 39

WCO Iron Condors

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SLIDE 40

Iron Condor

  • 4 Options Spread

– Vertical Put Spread & Vertical Call Spread

  • 4 Strike in Same Month

– Oct 92.00 / 94.00 / 96.00 / 98.00

  • Middle 2 Strike = “Body”

– 2 ATM Calls/Puts for each Strike of Body

  • Outside Strikes = “Wings”

– 1 OTM Call/Put on each wing

  • Limited Risk & Limited Reward
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SLIDE 41

Iron Condor

  • Long Iron Condor

– Short Vertical Put Spread

  • -1 Oct 94.00 / 92.00 Put Spread

– Short Vertical Call Spread

  • -1 Oct 94.00 / 96.00 Call Spread
  • Short Iron Condor

– Long Vertical Put Spread

  • +1 Oct 94.00 / 92.00 Put Spread

– Long Vertical Call Spread

  • +1 Oct 96.00 / 98.00 Call Spread
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SLIDE 42

Iron Condor

  • Long Iron Condor
  • 92 / 94 / 96 / 98
  • Net Credit $.75

– Max Profit = Net Credit

  • $.75

– Max Loss = Diff in Strikes – Net Credit

  • $1.25

– Upper B/E = Short Call Strike + Net Credit

  • 98.75

– Lower B/E = Short Put Strike – Net Credit

  • 91.25
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SLIDE 43

Questions?

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SLIDE 44

Open a Paper Trading Account

  • Think or Swim

–www.optionsuniversity.com/TOS

  • Case Sensitive!
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SLIDE 45

More Information about PHLX WCO

  • PHLX Website

– www.phlx.com

  • PBOT Website

– www.phlx.com/pbot/index.html

  • PHLX Webinars

– www.phlx.com/products/webinar.html

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SLIDE 46

Trading Resources

  • Options Volatility and Pricing, Natenberg
  • Options as Strategic Investments, McMillan
  • www.Investopedia.com
  • www.theoptionsguide.com
  • www.cnbc.com

– Markets Section

  • www.wallstreetteachers.com
  • Yahoo Finance
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SLIDE 47

Thank You.

Gregory McDermott, MApp Fin OU Chief FX Strategist

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SLIDE 48

Butterfly

  • Max Profit and Loss - 92/94/96

– Max Value @ Expiration $2.00

  • Underlying Closes @ Middle Strike

( 94.00) – Min Value @ Expiration $0.00

  • Underlying Closes Outside Wings

– P&L Calculation

  • Debit or Credit?
  • Spread Value @ Expiration