=== IGMARKETS Options day trading: What is the risk? ===
Lets take the following two situations comparing Spot Euro forex with http://www.igmarkets.co.uk day expiry options on 6 Oct.2009:
1)Euro spot trading 4750 short Euro 2mini with 15pip stop loss at 6pm Cyprus time. Euro peaks at 4760 before declining to 4660 at option expiry time , one hour before Dow closes. Risk is $30 on the trade with eternity for the trade to go profit as long as stop isn't taken out.
Risked $30 to make $180 within a time from of 4hours from 6pm - 10pm Cyprus time(Metatrader clock).
2)Oct6.2009 Euro spot 4750(6pm Cyprus), buy (0.5 Euro PUT) with strike 4725 at ($4sell $7buy) for $35. Risk $35(option premium) with expiry one hour before Dow closes, time expiry of 4hours counts against the trade. Only 4hours left for trade to go in the money.
The option trade at expiry is worth 4660 - 4725 = 75 pips/2. Or $375 profit. You risked $35 to make $375 in four hours. At 7:50pm a 1,2pip movement resulted in $3.5 movement on the 0,5 purchase option, but it wasn't yet in the money. The spot traded netted $180, thus $195 more on option trade , but is highly unlikely to achieve this on a consistent basis in a time frame of 4hours(100 pips 4hours), it is just not worth the risk with an option expiring.
At 7:53 pm option is (5sell, 8buy), thus after 17pip decline from entry you are still at a loss, around this point 1pip movement down = $2, the same as if you had gone short on spot. AT 4731 you can only close option at 7.3 , thus barely making a profit after a 19pip decline, where the spot would have netted you $36 by now. At 8pm 4723 you can sell at 10.. 4720 (sell 12), bought at 7 or about $30 profit, but the Euro short spot trades now at $60 profit. At 8:15pm spot 4723 option (sell -10). At 8:20pm 4718 (sell-12.7), intrinsic value now at 7points. The profit if selling the put is $63 - $35 = $28. Spot Euro profit at $64. AT 9:03pm , one hour left before market close on Dow the option can only be sold for
14,3 (bought at 7) with Euro at 4712 or 15pips in the money. Thus the risk at this point is profit of $35 for an option premium of $35. Compare this to the Spot Euro (2mini contracts) with $76 profit.
The stoploss was pegged at 15pips the max loss for spot trade can only be $30 about the same as for the option, but the risk/return ration even after the option goes in the money doesn't justify the premium paid for the option. The option premium given the time till expiry is outrageous. Only as the option goes deep in the money around 80pips would more be made than on a spot trade, but the time frame it must happen in (4hours) makes this unlikely to occur regularly enough to justify the option premium.
3)The euro spot trade can be closed immediately after purchase for 2pips spread or $2 loss. The PUT option can only be closed after immediate purchase at $4 or an effective 13pip spread on the Spot trade or $13 loss
=== Conclusion ===
It seems IGMARKETs have found a way of "pseudo selling" an Euro option, while what it really amounts to is a normal Spot short trade with a huge spread of an effective (13pipsx2) = 26pips. They hedge their risk by the fact that very few traders actually make money in Forex ( only 5%) and thus work on an assumption that most options will expire worthless and knowing that it is highly improbable for anybody to repeatably make 80-100 pips in 4hours. It is a matter of probability but they have stacked the deck against traders with their day options, only they are winning this game in the long run. The small advantage over the spot is you have till expiry for the trade to come back in the money where on the spot trade you would have been stopped out at 15pips. But not at the huge option premium that has to be paid. It doesn't make it viable to trade at these option premiums compared to spot trading. I would be interested in your views on this and any possible flaws in my logic.
Lets take the following two situations comparing Spot Euro forex with http://www.igmarkets.co.uk day expiry options on 6 Oct.2009:
1)Euro spot trading 4750 short Euro 2mini with 15pip stop loss at 6pm Cyprus time. Euro peaks at 4760 before declining to 4660 at option expiry time , one hour before Dow closes. Risk is $30 on the trade with eternity for the trade to go profit as long as stop isn't taken out.
Risked $30 to make $180 within a time from of 4hours from 6pm - 10pm Cyprus time(Metatrader clock).
2)Oct6.2009 Euro spot 4750(6pm Cyprus), buy (0.5 Euro PUT) with strike 4725 at ($4sell $7buy) for $35. Risk $35(option premium) with expiry one hour before Dow closes, time expiry of 4hours counts against the trade. Only 4hours left for trade to go in the money.
The option trade at expiry is worth 4660 - 4725 = 75 pips/2. Or $375 profit. You risked $35 to make $375 in four hours. At 7:50pm a 1,2pip movement resulted in $3.5 movement on the 0,5 purchase option, but it wasn't yet in the money. The spot traded netted $180, thus $195 more on option trade , but is highly unlikely to achieve this on a consistent basis in a time frame of 4hours(100 pips 4hours), it is just not worth the risk with an option expiring.
At 7:53 pm option is (5sell, 8buy), thus after 17pip decline from entry you are still at a loss, around this point 1pip movement down = $2, the same as if you had gone short on spot. AT 4731 you can only close option at 7.3 , thus barely making a profit after a 19pip decline, where the spot would have netted you $36 by now. At 8pm 4723 you can sell at 10.. 4720 (sell 12), bought at 7 or about $30 profit, but the Euro short spot trades now at $60 profit. At 8:15pm spot 4723 option (sell -10). At 8:20pm 4718 (sell-12.7), intrinsic value now at 7points. The profit if selling the put is $63 - $35 = $28. Spot Euro profit at $64. AT 9:03pm , one hour left before market close on Dow the option can only be sold for
14,3 (bought at 7) with Euro at 4712 or 15pips in the money. Thus the risk at this point is profit of $35 for an option premium of $35. Compare this to the Spot Euro (2mini contracts) with $76 profit.
The stoploss was pegged at 15pips the max loss for spot trade can only be $30 about the same as for the option, but the risk/return ration even after the option goes in the money doesn't justify the premium paid for the option. The option premium given the time till expiry is outrageous. Only as the option goes deep in the money around 80pips would more be made than on a spot trade, but the time frame it must happen in (4hours) makes this unlikely to occur regularly enough to justify the option premium.
3)The euro spot trade can be closed immediately after purchase for 2pips spread or $2 loss. The PUT option can only be closed after immediate purchase at $4 or an effective 13pip spread on the Spot trade or $13 loss
=== Conclusion ===
It seems IGMARKETs have found a way of "pseudo selling" an Euro option, while what it really amounts to is a normal Spot short trade with a huge spread of an effective (13pipsx2) = 26pips. They hedge their risk by the fact that very few traders actually make money in Forex ( only 5%) and thus work on an assumption that most options will expire worthless and knowing that it is highly improbable for anybody to repeatably make 80-100 pips in 4hours. It is a matter of probability but they have stacked the deck against traders with their day options, only they are winning this game in the long run. The small advantage over the spot is you have till expiry for the trade to come back in the money where on the spot trade you would have been stopped out at 15pips. But not at the huge option premium that has to be paid. It doesn't make it viable to trade at these option premiums compared to spot trading. I would be interested in your views on this and any possible flaws in my logic.