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What is this OPTION?

  • #1
  • First Post: Sep 20, 2006 1:56am Sep 20, 2006 1:56am
Over at FXCM's news, I kept hearing/reading OPTION, OPTION Expiring on Friday/Monday ... yada yada yada...

What is that?

From my initial knowledge, it suggests something like a gamble wherein people place bets betting that a Pair will go up 200 pips or down 200 pips within 1 week... yada yada.. if that happen, they win, otherwise they loose.

Is this correct?
  • #2
  • Sep 20, 2006 2:01am Sep 20, 2006 2:01am
maybe a bit like the box options on oanda. I thought I'd found the grail placing a long thin line on USD/HKD at 6pm GMT to expire at 10PM GMT....worked 99/100 then blew the lot.
TRADE FOR SWAP
  • #3
  • Sep 20, 2006 3:24am Sep 20, 2006 3:24am
just like in the stock market you have options. You can trade options in the forex market(OTC). There are various usually people determine the volatility of a market using an option.. A option can also be used to hedge risk or create strategies where no matter where the market moves you make a profit. Options is a useful tool when used properly
  • #4
  • Sep 22, 2006 9:05am Sep 22, 2006 9:05am
Quoting varunk666
just like in the stock market you have options. You can trade options in the forex market(OTC). There are various usually people determine the volatility of a market using an option.. A option can also be used to hedge risk or create strategies where no matter where the market moves you make a profit. Options is a useful tool when used properly
Can you give an example?

I still dont know what this option is...
  • #5
  • Sep 22, 2006 9:39am Sep 22, 2006 9:39am
Quoting BurgerKing
Can you give an example?

I still dont know what this option is...
Weird, but predictable, events often do happen prior to the expiration of options. Follow the link. I'd be happy to answer any questions you still may have.

http://www.investopedia.com/articles.../04/101304.asp

best.
  • #6
  • Sep 22, 2006 10:03am Sep 22, 2006 10:03am
@BurgerKing:

Take a look at the attachment below.

fast
Attached File(s)
File Type: pdf Understanding Options.pdf   452 KB | 681 downloads
  • #7
  • Sep 22, 2006 10:06am Sep 22, 2006 10:06am
Quoting BurgerKing
Can you give an example?

I still dont know what this option is...
I haven't traded Options for years so the numbers that follow are purely for example and have no basis in reality.
AND they are based in my experiance with Commodity Futures

Trading Options is every bit as [perhaps even more] complex as Trading Forex and cannot be explained simply by an example.

Essentially, Options have 2 catagories.
Puts {Bearish if you Buy, Bullish if you Sell}
and
Calls {Bearish if you Sell, Bullish if you Buy}

If you Put an Option in the Market {Buy A Put}, you have Sold @ a pre-determined Price {The Strike}
If you Call an Option in the Market {Buy A Call}, you have Bought @ a pre-determined Price {The Strike}
{It can get quite complicated from there as you have the ability to Sell Puts or Calls also. Not to mention anything about NT, DNT etc... etc...}

How much you have to Pay for this Option will be controlled by 2 Main Factors.
a) How long until the Option Expires. {Time Factor}
b) How close the Current Market Price is to the Strike.



Example.
You think the EuUS is going to reach 1.3200 and it will get there by March '07

You can...
Buy 1 Full Lot Eur/USD @ 1.2800 and wait till Spring Next Year to Cash In.
But what if you are Wrong
Downside: Paid Margin out of Account and it is going against you even further to the point that the Account is now down $2,000.00. {MM Aside for now}

Option
Hey you know what, I THINK the EuUS is going to reach 1.3200 But I'm not Sure.
I would like the Option to be Long the EuUS if it even get's close to there BUT I don't want to Risk my Entire Account to do so.
Then you can...
Buy a March 07 Call. Strike 1.3200 and pay $300.00 for the OPTION to be long.
Downside: Maximum $300.00 Loss. {The Cost of the Option. If the price Never gets close to 1.3200, the Option will "Expire Worthless."}

Upside: If EuUS get's to 1.3200 BEFORE your Option EXPIRES next March you have some Choices.
1) Sell your Option Back to the Market for more than the $300.00you paid for it. This is the most common choice.
{Remember that the Closer you get to Expiry, the Time Factor will start to Erode the Value of your Option as it now has Less Time to get to the Strike.}

2) If the Price goes through 1.3200 and reaches 1.3400 you can Excercise your Option to Buy @ 1.3200 and effectively be Long EuUS from 1.3200.

I hope this not only gives you an idea how complicated options can be but Why the news that Major Players are defending a 1.2800 1.2900 DNT {Double No Touch} Option may be important to you.

Whew.......
  • #8
  • Sep 22, 2006 10:23am Sep 22, 2006 10:23am
Bemac, my friend, you're one post shy from reaching 1000. what are you waiting for? post another one !
  • #9
  • Sep 22, 2006 10:35am Sep 22, 2006 10:35am
Quoting dunningduke
Bemac, my friend, you're one post shy from reaching 1000. what are you waiting for? post another one !
Honestly I never noticed.
I guess my 1,000th post was to Phil in the Members Lounge re his Workstation.


WooHoo A Post Millennia :surprised
  • #10
  • Sep 22, 2006 3:06pm Sep 22, 2006 3:06pm
Quoting Bemac
Option
Hey you know what, I THINK the EuUS is going to reach 1.3200 But I'm not Sure.
I would like the Option to be Long the EuUS if it even get's close to there BUT I don't want to Risk my Entire Account to do so.
Then you can...
Buy a March 07 Call. Strike 1.3200 and pay $300.00 for the OPTION to be long.
Downside: Maximum $300.00 Loss. {The Cost of the Option. If the price Never gets close to 1.3200, the Option will "Expire Worthless."}

Upside: If EuUS get's to 1.3200 BEFORE your Option EXPIRES next March you have some Choices.
1) Sell your Option Back to the Market for more than the $300.00you paid for it. This is the most common choice.
{Remember that the Closer you get to Expiry, the Time Factor will start to Erode the Value of your Option as it now has Less Time to get to the Strike.}

2) If the Price goes through 1.3200 and reaches 1.3400 you can Excercise your Option to Buy @ 1.3200 and effectively be Long EuUS from 1.3200.
I see. So this particular option scenario you just described is more like:
"paying a fee in exchange for the right to purchase a currency at the strike price regardless if the price is higher..." Of course I am not oblidged to buy should the price never touch the strike price... Is this correct?

If so, can I capitalize on this option as part of a hedge strategy?

I go long GBPJPY (for the interest) @ 221.40
Assuming my account can only withstand 500 pips of reversal, I buy an option for a GBPJPY not going lower han 217.00 pips within 1 year.
Should GBPJPY go lower than 217.00, I can "sell" GBPJPY at 221.40 to the option house.

Of course, if the price never touches 217.00 within 1 year, I lost the option fee.

Is this correct?
  • #11
  • Sep 22, 2006 3:45pm Sep 22, 2006 3:45pm
Quoting BurgerKing
I see. So this particular option scenario you just described is more like:
"paying a fee in exchange for the right to purchase a currency at the strike price regardless if the price is higher..." Of course I am not oblidged to buy should the price never touch the strike price... Is this correct?

If so, can I capitalize on this option as part of a hedge strategy?

I go long GBPJPY (for the interest) @ 221.40
Assuming my account can only withstand 500 pips of reversal, I buy an option for a GBPJPY not going lower han 217.00 pips within 1 year.
Should GBPJPY go lower than 217.00, I can "sell" GBPJPY at 221.40 to the option house.

Of course, if the price never touches 217.00 within 1 year, I lost the option fee.

Is this correct?
Close.
I go long GBPJPY (for the interest) @ 221.40
Assuming my account can only withstand 500 pips of reversal, I buy a 217.00 PUT Option for a GBPJPY.
Should GBPJPY go lower than 217.00, my Put Option will have gained in Value offsetting some of my Spot Long Losses.

*Note* Instead of
Buy a 217.00 Put Option, you could alternatively
Sell a 225.00 Call Option.

Although they Sound similar, The Premium {cost of insurance} will be different.

Options are a very common method of Hedging in Futures.
  • #12
  • Sep 22, 2006 5:09pm Sep 22, 2006 5:09pm
why sell option?

Im starting out a GBPJPY carry trade and needed a hedge against possible GBPJPY downmove. short CHFJPY is not reliable - CHF is only half the value of GBP so, though theere is strong correlation between the GBPJPY and CHFJPY, the pips movement is not the same. (GBPJPY moved several 1700 pips since jan while chfjpy moved only 500)...

seems like OPTIONS and a separate non interest account is a way to go for carry trades.
  • #13
  • Sep 22, 2006 6:10pm Sep 22, 2006 6:10pm
Forex Options are "European Style", meaning you can't exercise them BEFORE expiry.. You can ONLY exercise them ON the expiry date. Before that date, you can only sell them on the open market, which will not gain you as much as they would be worth IF you could exercise them at that same time.

And yes, BK, you are purchasing the RIGHT, not the OBLIGATION. (oh, and I did PM response you, hope you got it...).

The cost for this RIGHT is the PREMIUM. If the option goes your way, and you exercise at expiry for a profit, your profit is reduced by the premium. If the market goes against you, and you let the option expire worthless, your MAXIMUM risk is the premium, the cost of the option. Many beginners start with options as they are cheap, and you get leverage, BUT they are (can be) pretty complicated....
  • #14
  • Sep 22, 2006 6:37pm Sep 22, 2006 6:37pm
thansk for the inputs; i know have some basic idea on this and study it from there if it is worth it for hedging..


@mrkam,

I did not receive any PM..
  • #15
  • Last Post: Oct 5, 2014 10:27am Oct 5, 2014 10:27am
Binary options are really nice BUT you really have to know the market direction before using them.they are heavily dependent on the trend for them to be profitable
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