I am posting this thread that will hopefully turn into a resource for Forex Options strategies.
I have not used options in Forex to-date but would like to use then as a hedging tool for a spot position to reduce a potential loss instead of using stoploss orders. I can see that the advantage of hedging with Forex options instead of using a "stop" would be that we can stay in the market despite the movements against our spot position and still have an unlimited profit scenario. The disadvantage is that we would need a good risk reward system that has a larger gain in the spot position before we make a profit as we need to pay for the option premium.
Now as an example our trading systems gives us a signal that speculates that the exchange rate of the GBP/USD will decline over the next month. We sell 1,000,000 GBP on margin at the spot price of 1.8000. Now if we want to protect this position we would normally set a stoploss in case the GBP rises at possibly the daily ATR.
Now the other way would be to protect our position from a limitless loss using an option. As a holder of this option we will maintain the potential for an unlimited profit because our spot position can stay open until the excersise date of the option. If our spot position moves against us and stays there then the option will increase in value offsetting the spot losses giving us a total loss scenario of the option premium. So this scenario of an option instead of a stop loss order will allow us to stay in the market longer that would not be possible with a stoploss order. In a stoploss scenario we could find ourselves re-entering the market many times after rebounds, especially in a market with high volatility.
Please let us know if you use an option strategy as part of your risk factor when trading forex and the strategies that have been successful for you.
I have not used options in Forex to-date but would like to use then as a hedging tool for a spot position to reduce a potential loss instead of using stoploss orders. I can see that the advantage of hedging with Forex options instead of using a "stop" would be that we can stay in the market despite the movements against our spot position and still have an unlimited profit scenario. The disadvantage is that we would need a good risk reward system that has a larger gain in the spot position before we make a profit as we need to pay for the option premium.
Now as an example our trading systems gives us a signal that speculates that the exchange rate of the GBP/USD will decline over the next month. We sell 1,000,000 GBP on margin at the spot price of 1.8000. Now if we want to protect this position we would normally set a stoploss in case the GBP rises at possibly the daily ATR.
Now the other way would be to protect our position from a limitless loss using an option. As a holder of this option we will maintain the potential for an unlimited profit because our spot position can stay open until the excersise date of the option. If our spot position moves against us and stays there then the option will increase in value offsetting the spot losses giving us a total loss scenario of the option premium. So this scenario of an option instead of a stop loss order will allow us to stay in the market longer that would not be possible with a stoploss order. In a stoploss scenario we could find ourselves re-entering the market many times after rebounds, especially in a market with high volatility.
Please let us know if you use an option strategy as part of your risk factor when trading forex and the strategies that have been successful for you.