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Want to make a bigger premium on your forex positions?
By John Jagerson, 27 Aug 2007 As many of you know, I am a big advocate for the advantages of using options in the forex. They are a great way to speculate, manage risk and hedge against losses in your forex portfolio. The same strategies used by options traders in the stock market can be applied to a forex position with a few minor modifications. One of the most popular options strategies out there in the stock market is the covered call. This idea can be used in the forex with similar benefits. The idea behind a covered call is to enter a long position in a security or forex pair, I will use the USD/CAD in this example, and then to sell a call option against that position. You get paid the premium for that call option and can keep all of it if it expires out of the money. It simultaneously pays you a nice premium and hedges downside risk. It is considered "covered" because the losses you would normal incur on a naked call when the market runs up are offset by the gains in the underlying. The trade off is that you have given up some profit potential if the pair moves big to the upside. This is a great strategy when you are not sure the market is going to move very far or want to hedge a little risk to the downside. In my example, I would apply this strategy to the USD/CAD which is priced at 1.0545 as I write this article. I can sell a call with a strike price of 1.0550 for $110 per contract or basically the equivalent of 110 pips per $10,000 lot. If the market rises, I will get "called out" and get to keep my $110 of profit. If the market falls, the call will also fall in value and ultimately I could let it expire on the third Friday of September worthless. If that happens, I will keep the $110 per mini-lot, which can offset some of the losses I have accumulated. I am now free to repeat the process over again for the next month. This can be a great way to take advantage of a currency pair that is channeling in a tight range and that I think will likely continue to do so over the short term. Before entering a position like this you should probably have a fairly neutral outlook on the pair and be ready to close the position if the market begins to run down very quickly. [IMG]http://www.pfxglobal.com/images/john/usdcad8272007.png[/IMG] USD/CAD
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