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Buy Put Option & Buy GBP/JPY risk free?

  • #1
  • First Post: Mar 3, 2007 11:04pm Mar 3, 2007 11:04pm
I haven't priced this out yet but, couldn't one, Buy an out of the money Put Option & Buy GBP/JPY spot? You would hold these positions for about a year until the option expires, collecting interest in the long GBP/JPY spot. The interest would offset the premium paid for the Put Option. Would the interest earned, more then offset the cost of the option premium and the difference between the option strike price and the initial GBP/JPY value?
  • #2
  • Mar 3, 2007 11:41pm Mar 3, 2007 11:41pm
Quoting jeffreytp
I haven't priced this out yet but, couldn't one, Buy an out of the money Put Option & Buy GBP/JPY spot? You would hold these positions for about a year until the option expires, collecting interest in the long GBP/JPY spot. The interest would offset the premium paid for the Put Option. Would the interest earned, more then offset the cost of the option premium and the difference between the option strike price and the initial GBP/JPY value?
The option would already have the interest priced in when you buy it.
  • #3
  • Mar 3, 2007 11:45pm Mar 3, 2007 11:45pm
This is a good question...but it would depend on the premium.

The pip gain per day on the GBP is around 2.8 - 3.2 pips and this is expected to shrink over the coming months.

There was an example on Saxobank's website that had a GBP/JPY one-month option with a 154 pip premium.

Given that information, it wouldn't be enough to break even. In fact, you'd have to hold the full position open for 55 days before you'd break even.

If the premium were less per month, then I'd say it may be worth the effort, but you'd really have to price it out.

Quoting jeffreytp
I haven't priced this out yet but, couldn't one, Buy an out of the money Put Option & Buy GBP/JPY spot? You would hold these positions for about a year until the option expires, collecting interest in the long GBP/JPY spot. The interest would offset the premium paid for the Put Option. Would the interest earned, more then offset the cost of the option premium and the difference between the option strike price and the initial GBP/JPY value?
  • #4
  • Nov 23, 2008 2:24am Nov 23, 2008 2:24am
It all depends on the premium of the option. At the moment options are very good investments this is because they are priced on previous volatility. Due to the current financial crisis the volatility has increased, therefore the probability of the spot price rising above the strike price increases. This means options to some degree are undervalued.

I am sceptical that you will find an option with a premium lower than the interest gained. In the Black Scholes model of option pricing the cost of carrying the option would be negative. This is due to the beneficial interest gained. As a result, the premium would have factored in the interest gain from the currency pair. Furthermore, changes in the exchange rate itself (affecting the true value of interest payments) and central bank policy are other factors of risk to consider.

I'm not saying it's impossible but it is highly unlikely!
  • #5
  • Last Post: Nov 24, 2008 5:07pm Nov 24, 2008 5:07pm
Quoting jeffreytp
I haven't priced this out yet but, couldn't one, Buy an out of the money Put Option & Buy GBP/JPY spot? You would hold these positions for about a year until the option expires, collecting interest in the long GBP/JPY spot. The interest would offset the premium paid for the Put Option. Would the interest earned, more then offset the cost of the option premium and the difference between the option strike price and the initial GBP/JPY value?

it's called a covered position. they do this in commodities futures all the time. it's not entirely risk free, but it is more beneficial than having an uncovered trade. the only thing you have to watch for is the expiration date on the option. im not too familiar with forex options, but i'm assuming they work the same way.

as for the interest, like i said before, i have no idea how forex options work so i also have no idea about the interest. but the difference between the strike and the currency prices would already be covered by the moves of the currency:

say you bought a put at 150.00 and bought GBPJPY at 150.06 or something. say the pair moved down to 145.06. the actual trade would be down 100 pips and if you exercised the put, you would be up about 94 pips. so you would only be down about 6 pips.

i hoped some of that helped, but it probably was stuff you already knew happy trading.
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