Successful Box Option Trades (Oanda)

Hi,

I was just wondering what everyone thought about trading box options? I have just switched to oanda in the last couple of weeks, and have been confronted with what seems to be a potentially profitable way of trading without spending much time at the computer. Has anyone used them before, are there any major pitfalls i should be aware of? I think they would be a good way to make money off retracements, or continuation of a trend after a retracement. Does anyone have any other ideas how they could be used? Im mainly a swing trader, and trendfollower, but would love to hear any suggestions you may have! Cheers!!

SWTRADE

It's very easy to make money with this. I imagine this is very popular since they open it up to more pairs now. I trade box option with the news. Most often time, the market is flat before big news. So set a long vertical box in FRONT on the time of the news release because it's mostly that the price will go side way up until the release.

had'nt really given that tecnique a thought, could you post some screen shots of your box option trades?

Sure

For those who haven't seen these before, the basic idea is you draw a box on the brokers graph indicating the time / price coordinates of where you think the price will hit or miss. If you choose hit and it misses ( or vice versa) then you lose the initial purchase price. However, if you set the box, and the price starts moving towards it, you can still sell it at a profit if it comes close to it (and you decide it will not hit / miss). I think its good for trendfollowers, because if you put it anywhere near the projected continuation, your likely to make a profit. Great ideas so far, keep them coming!! Ive attached a picture of a couple of Box Options I did on my demo account (to try it out), for you to see. I made 50% profit on the first, and 125% on the second. This is the last two days before the weekend on EUR/USD (18/19 Jan 2007).

SWTRADE, can you give us an idea of what the risk:reward is for the two box examples you showed? Also, how is the option price calculated? How do you know that you got a fair price for the box?

SWTrade

How do you decide where to draw the box or what other indicators do you use to decide?

you should try a miss box 15 minutes from news time, that is 10 pips high, allowing a first swing in either direction, a possible counterswing of price and a consolidation afterwards. On a 5 min chart it yelded me quite some money since the miss boxes in front of the price have a 3x or 4x payout. i think the boxes do not "understad" news, yet....
on a demo acc, ofc...

Phil:
You can pay whatever you want for the box, thats completely your choice, they calculate the potential profit (inc. what you paid) given the parameters you enter (coordinates, hit/miss, purchase price). The "less likely" it is to hit/miss the box the more you will make. I bought each for 100USD near the peaks (the second box option was bought closer to the peak, hence greater profit). Because I was far away from the box, and the trend was moving in the opposite direction, the box was worth more. If you are at the peak you will lose most of your money on purchase, until it starts moving to where the box is (I think when i bought the second it went to 30-35USD on purchase).

et phonehome:
I basically just decide if the price is trending up/down/sideways, given the past few days, and that determines the position of the trough / peak. Then i determine the timing using cycle analysis and/or major support / resistance lines. You could use MACD peaks and trough to determine when to buy, but i wouldnt recommend it as sometimes this can be hard to pinpoint beforehand.

Fxnoob:
Thanks for the idea!! I wasnt sure how i could use the miss box, as all my reading and practice was to determine where price was going, not where it wasnt!

Just to make sure I understand you then: You paid $100 for the first box and made $50 so you made $1 while risking $2. What about the original price of the option? Did you make $50 over the $100 you paid?

And, I guess the bigger quesiton is how do you know you got a fair price for your box? Is there some kind of pricing formula available to you?

I think the boxes are too risky because they bring another variable in consideration: time. Usualy you have to predict the direction of the price, but with the boxes you also have to predict when exactly this will happen. This complicates things a little.

I don't think the formula for the boxes is somewhere on oanda's site, but you can easily guess that it's based on the size of the box (smaller=> bigger the reward) and time (as far as it gets as bigger the reward is).

The box option pricing is total bullshit. Risk reward is so badly skewed against the purchaser that it is all but impossible to make any money with them long term. And the news trading opportunity is destroyed as well due to the fact that an arbitrary (and rediculously overstated) implied volatility component is added for any box that intersects a 30 minute window of an expected announcement.

If you like the concept then just trade pure options. At least then price discovery is handled by the market as opposed to the whim of the casino.

DS,

That is pretty much where I was headed with this. Given the general mistrust of brokers, I am baffled that someone would trust them to price out an option without knowing the formula for it. Real stock options on currencies will be out soon. The underlying symbols have already been released. They are XDE (euro) and XDB (pound).

Phil:
Sorry I might not have explained that, that well. Ok, so i bought each for 100USD, and on the first the payed out about 150, and on the second it was 226. So on the first one i made 50% profit, as the 100 of the 150 is me getting my money back (once you buy it the money leaves the account, and you get a resale price, which changes as price moves - the closer it gets to the box the more it is), and on the second about 125%. So when you buy, before you accept the deal they tell you how much you will get if you hit/miss. So you have two choices once bought either you can wait for your prediction to come true if you got it right, or you can sell the box back to them, if you think it will not make it. the resale price could mean a loss of all the initial deposit if it goes in completley the wrong direction, or it could come close to the box, possibly giving you a profit if you analyse it correctly. Im not aware of the formula, but its clear the further away you are on purchase, the greater the rewards, and the closer it gets once bought, the more money made. Hope thats clear.

dof:
I think i might have agreed with you if i hadnt researched cyclical analysis as a technical tool. In-fact I think that time is easier to determine than price, there is generally a lower degree of differentiation. Thats one of the main reasons I swing trade, and not just trend follow. There are some good books you can read if your interested:

Hurst, J M - The Profit Magic Of Stock Transaction Timing
Bressert, Walter - The Cycle Trading Pattern Manual
Millard, Brian J. - Channels & Cycles - A Tribute to JM Hurst

Darkstar:
I understand your concerns, i think the only way to make money off them is if you are sure the market is going to retrace, or continue the trend (but that could just be due to my trading style). You do need to put the box a good distance away to make if worth while, and if there is a way other than cyclical analysis to do this i would love to know.

Bye for now
SWTRADE

The moment I read the brief for these things I thought "House Wins".

They (Oanda) seem to use the same excitement you often see warrant issuers using in there prospectuses to suck in inexperienced traders.

I have no doubt they are a way to trade. You'd have to be very good at what you do though. ...And if you were that good you'd know better. LOL

Here's my example chart. I use them to hedge long term positions at the moment. When I have time I go short term and catch volatility. I think they are better than buying off an option broker because you can't always get what you want there. For example I have received 300%+ ROI in an hour or two. But like anything you have to be careful and patient.

http://daemos.ath.cx/stuff/07/audboxes07.png

Jack, I just have a simple question for you guys...how do you know you paid a fair price for the option? Most people don't trust their broker to quote them a good price. Now you are writing a blank check for price, time, and volatility.

Fair question... my option pricing knowledge is "rough" to say the least. I'm pretty much looking to "lay off" risk and judge payout on that alone. ie. if i'm short spot and +ve pips i will look to hedge any retrace if spot doesn't keep going to my target. This helps because I can often pay for the spot exposure and in turn get more life out of the position (who knows it may go my way again). I find this good because you don't have to worry about direction and seeing as the market is generally range bound you just have to limit risk until you get onto a decent winner (450+ pips)

You might beable to see the orange miss box around jan 8 (its orange because i sold it before expiry)... i started selling into it because it was expensive to buy (ie. i spent to much on it). if spot kept falling i was killing most of the potential spot profit ... it was at this time i started to long usd/chf i think late dec/jan. I've found after a few years that building exposure by hedging in the "short term" is the only real way for me to ride the market.

Phil:
I know its a simple question, but its quite difficult to answer. The only way i can think of answering it simply is: why do you buy / sell more contracts when you are sure your predictions are correct? If you are convinced something is going to happen you enter the trade. The only real difference is the potential profit / loss. The MAXIMUM loss is always what you initially paid - no more. However, the potential net profit can be greater than the initial deposit. I dont suggest buying a box for any amount greater than your money management system allows, for a normal maximum loss, i would even say try half of that maximum as a box option maximum. I think it really depends on how confident you are in your method. Only you can decide if it is the right price as you are the one that drew the box.

Jack:
Thats a lot of boxes!! Nice to see most of them are green (winners). Do you have any idea the rough percentage of overall winning-losing boxes you have? Do you just use them for longer time periods? Is there a particular method you use to determine the position? Im still unsure about the miss boxes, they scare me a little. How do you know its going to miss, given volitility?

I am trying to goof around with boxes on a demo account but it always says: Purchase price is too low.

?