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FX Spot and Options

  • #1
  • First Post: May 5, 2017 10:55am May 5, 2017 10:55am
Guys,

Just like the equivalent of Long EURUSD and Short AUDUSD would be Long EURAUD.

Would this property apply to Options:?

Long EURUSD Call and Short AUDUSD Call would be Long EURAUD Call?

Thanks
  • #2
  • Edited 11:47am May 5, 2017 11:34am | Edited 11:47am
Quoting aaven
Guys, Just like the equivalent of Long EURUSD and Short AUDUSD would be Long EURAUD. Would this property apply to Options:? Long EURUSD Call and Short AUDUSD Call would be Long EURAUD Call? Thanks
No, you'd have to be long EU Call & long AU Put.

***If shorting AU call, that would need to be deep ITM & need to continue to roll ITM if price moved fast.
***Be aware of premium decay or you'll lose money even if you get the direction correct.
***Short AU Call would have unlimited risk. Being long AU Put has limited risk.
  • #3
  • May 5, 2017 5:00pm May 5, 2017 5:00pm
I'm sure the Implied Volatility(?) of an EurUsd Call & AudUsd Put would not exactly equal the price of an EurAud option. Like the EurAud may move more than EurUsd and AudUsd, throwing the calculation off. Interesting though.
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  • #4
  • May 6, 2017 5:23am May 6, 2017 5:23am
Quoting srt
{quote} No, you'd have to be long EU Call & long AU Put. ***If shorting AU call, that would need to be deep ITM & need to continue to roll ITM if price moved fast. ***Be aware of premium decay or you'll lose money even if you get the direction correct. ***Short AU Call would have unlimited risk. Being long AU Put has limited risk.
Srt,

Thanks for your inputs. I have a really newbie question coming along your way:

A Spot FX Position of Long EURUSD= Buy EUR/Sell USD

In options, the equivalent{Understanding Purpose} of Long EURUSD Call would be:

Buy EUR Call/Buy USD PUT (or) Buy EUR Call/Sell USD Call?

Thanks
  • #5
  • May 6, 2017 7:16am May 6, 2017 7:16am
Quoting aaven
{quote} Srt, Thanks for your inputs. I have a really newbie question coming along your way: A Spot FX Position of Long EURUSD= Buy EUR/Sell USD In options, the equivalent{Understanding Purpose} of Long EURUSD Call would be: Buy EUR Call/Buy USD PUT (or) Buy EUR Call/Sell USD Call? Thanks
Long EURUSD spot = long EUR call & long USD put. (except spot has unlimited loss but options has limited loss)

When you're long EURUSD spot, the EUR & USD have no limit to the upside or downside so profit/loss is unlimited.
When you buy a call or put, you have a limit to the loss but unlimited profit.
When you sell a call or put, you have a limited profit but the loss is unlimited.

Example: (forex options)
If bullish EURUSD, then buy EURUSD call.
If bearish EURUSD, then buy EURUSD put.

Example: (futures options)
If bullish EURAUD, then buy EUR futures call & buy AUD futures put.
If bearish EURAUD, then buy EUR futures put & buy AUD futures call.
  • #6
  • May 6, 2017 7:17am May 6, 2017 7:17am
Ya you won't be selling any Calls or Puts, just buying.

In spot: buying EurAud is buying Euro with Aussie Dollar. With options, EurAud is one security. If buying a call in EurAud, it's not a buy/sell like spot. Its 1 security and you've bought the option from your broker.
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  • #7
  • Sep 23, 2017 11:36pm Sep 23, 2017 11:36pm
Quoting srt
{quote} Long EURUSD spot = long EUR call & long USD put. (except spot has unlimited loss but options has limited loss) When you're long EURUSD spot, the EUR & USD have no limit to the upside or downside so profit/loss is unlimited. When you buy a call or put, you have a limit to the loss but unlimited profit. When you sell a call or put, you have a limited profit but the loss is unlimited. Example: (forex options) If bullish EURUSD, then buy EURUSD call. If bearish EURUSD, then buy EURUSD put. Example: (futures options) If bullish EURAUD, then buy...
Thanks SRT for the insights. Apologize for such delay in responding back.
  • #8
  • Sep 23, 2017 11:37pm Sep 23, 2017 11:37pm
Quoting Ryan420
Ya you won't be selling any Calls or Puts, just buying. In spot: buying EurAud is buying Euro with Aussie Dollar. With options, EurAud is one security. If buying a call in EurAud, it's not a buy/sell like spot. Its 1 security and you've bought the option from your broker.
Ryan,

Appreciate the guidance and really sorry about the delay.

Thanks
  • #9
  • Sep 24, 2017 12:10am Sep 24, 2017 12:10am
Quoting srt
{quote} Long EURUSD spot = long EUR call & long USD put. (except spot has unlimited loss but options has limited loss) When you're long EURUSD spot, the EUR & USD have no limit to the upside or downside so profit/loss is unlimited. When you buy a call or put, you have a limit to the loss but unlimited profit. When you sell a call or put, you have a limited profit but the loss is unlimited. Example: (forex options) If bullish EURUSD, then buy EURUSD call. If bearish EURUSD, then buy EURUSD put. Example: (futures options) If bullish EURAUD, then buy...
Nice explaination srt for a noob like me in the area of options trading. I just need some help or direction with position sizing or a option hedging strategy at the spot FX portfolio level. Ie total EUR exposure = x$ in USD so buy call/put of y$ in options....to protect downside risk when Spot FX is closed on weekends.
Staying in my lane...
  • #10
  • Sep 24, 2017 8:00am Sep 24, 2017 8:00am
Quoting VEEFX
{quote} Nice explaination srt for a noob like me in the area of options trading. I just need some help or direction with position sizing or a option hedging strategy at the spot FX portfolio level. Ie total EUR exposure = x$ in USD so buy call/put of y$ in options....to protect downside risk when Spot FX is closed on weekends.
As we discussed in the other thread I dont think you can get a perfect hedge with options because you need to set the contract size based on some kind of average risk which would not protect you from big moves, why not just open an opposing spot position over the weekend?
I live entirely from the growth of my personal trading account
  • #11
  • Sep 24, 2017 11:10am Sep 24, 2017 11:10am
Quoting VEEFX
{quote} Nice explaination srt for a noob like me in the area of options trading. I just need some help or direction with position sizing or a option hedging strategy at the spot FX portfolio level. Ie total EUR exposure = x$ in USD so buy call/put of y$ in options....to protect downside risk when Spot FX is closed on weekends.
Forex:
1 option = 1 standard lot (100,000 units)

Futures:
1 option = 1 futures contract

Equites/ETFs:
1 option = 100 shares

Example:
You're long 1 lot of EU forex @ 1.1900.
If you want protection, buy 1 EU 1.18 Put.
  • #12
  • Sep 24, 2017 11:14am Sep 24, 2017 11:14am
Quoting GuyBaker
{quote} As we discussed in the other thread I dont think you can get a perfect hedge with options because you need to set the contract size based on some kind of average risk which would not protect you from big moves, why not just open an opposing spot position over the weekend?
You can get 100% protection if your position is in whole lots & not fractions of a lot. Your protection will come @ a cost though. The protection will protect from huge moves but you'll need to subtract the premium cost of the option.
  • #13
  • Sep 24, 2017 11:24am Sep 24, 2017 11:24am
Quoting srt
{quote} You can get 100% protection if your position is in whole lots & not fractions of a lot. Your protection will come @ a cost though. The protection will protect from huge moves but you'll need to subtract the premium cost of the option.
Yeah if you pay a big enough premium anything is possible. But unless I am missing something this premium would need to be paid every time to project against very rare events
I live entirely from the growth of my personal trading account
  • #14
  • Sep 24, 2017 11:30am Sep 24, 2017 11:30am
Quoting GuyBaker
{quote} Yeah if you pay a big enough premium anything is possible. But unless I am missing something this premium would need to be paid every time to project against very rare events
Protection can be purchased & sold @ any time so the premium paid can be removed in no longer needed. Premium is usually more expensive if purchased right before a big news event. So many ways to use options that it doesn't have to be expensive.
  • #15
  • Sep 24, 2017 11:32am Sep 24, 2017 11:32am
Quoting srt
{quote} Protection can be purchased & sold @ any time so the premium paid can be removed in no longer needed. Premium is usually more expensive if purchased right before a big news event. So many ways to use options that it doesn't have to be expensive.
Yeah I am not sure what benefit there is in this case, protection against weekend gaps, over taking an opposing position or simply closing and re-opening. But probably I should do some more reading
I live entirely from the growth of my personal trading account
  • #16
  • Edited 1:28pm Sep 24, 2017 11:39am | Edited 1:28pm
Quoting GuyBaker
{quote} Yeah I am not sure what benefit there is in this case, protection against weekend gaps, over taking an opposing position or simply closing and re-opening. But probably I should do some more reading
Example:
EU @ 1.20 Friday close & you're long 1 cotract

Protection choices:
1-Sell 1 lot to offset long
2-Buy 1.20 Put for 50 pips

Sunday evening EU opens @ 1.25 because of some very good news.
Results:
1-Hedged position has no loss or profit because of the hedge.
2-Profit of 450 pips (500 pip gain minus 50 pip loss with Put)

If no news event & price opens @ 1.20 sunday evening then the 1.20 Put can be sold @ BE or a small loss. Sales price depends upon how close to expiration & volatility of the market @ time of sale.

***Edited because gain would be with a big increase. A big drop wouldn't see much difference between hedged position & Put protected position. Loss in spot would be offset by gain in Put.
  • #17
  • Sep 24, 2017 1:39pm Sep 24, 2017 1:39pm
Quoting VEEFX
{quote} Thanks SRT and Guy for your responses. I understand I will have to pay the premium as a cost to hedge my open positions during weekend gaps. It's considered "Portfolio Disaster insurance policy" and will have an associated cost. Here's my objective. I will always have open positions IN PROFIT of 50+ pips that I want to carry over the weekend. I close all my losing trades on Friday morning plus the ones that are less than 50 pips in profit. I could have more than 200+ positions open. I trade small (with less than 0.25% risk per trade) and...
1-I just adjusted the post above before you quoted it :-) Sorry, I explained it a bit incorrectly regarding the profit on drop/rise.
2-The "Portfolio Disaster insurance policy" you mentioned has nothing to do with options.
3-"Premium" & "insurance" we're talking about here are just generic terms used in the options industry to describe the cost & purpose of options.
4-Yes, you can protect just the US$ exposure if you can calculate the open exposure. You can only get protection in full lot sizes so you'd have to round to the nearest full lot position.
5-You would have to buy either a Call or a Put depending upon if your exposure was to the long side or short side.
6-You can buy protection with forex options or futures options since you're separating each currency.
7-Your protection can be closed sunday or Monday if you don't want to hold all the time because you'll get premium decay if you hold options. If you use SL during the week, you don't need the time-decaying options.

**In a hurry to go now but may add more detail later :-)
  • #18
  • Sep 24, 2017 3:28pm Sep 24, 2017 3:28pm
Quoting VEEFX
{quote} Thanks SRT. Makes sense. Have you (or know anyone) done this type of portfolio hedging in a live environment? This needs to be integrated with my automation (in MT4 for now and eventually via API). Since hedging and unhedging will be done during low volatile periods on Fri and Sun/Mon, the premium should be generally low (unless there is known activity on weekends like G20 meetings etc). I also HAVE to test this out in demo first so not sure how to move forward at this point. might be via nadex.
1-Nadex is a binary options broker. NOT what you want.

2-I would use a futures broker & buy futures options to get the protection. 1 futures contract is the same as 1 lot of spot forex.

3-Example 1: If you have 3.21 lots of Euro long exposure, buy 3 puts. That leaves just .21 unprotected. Small loss acceptable.

4-Example 2: If you have 2.76 lots of Pound short exposure, buy 3 calls. That's just .24 overprotected but options won't have a delta of 1 so protection is close to even.

5-I don't know any way to automate this with MT4. I think you'd have to manually buy Friday & close sunday/Monday.
  • #19
  • Sep 24, 2017 4:23pm Sep 24, 2017 4:23pm
Quoting VEEFX
{quote} Thanks srt for your time. Could you please expand on #1 why nadex is not a good fit. I am based in US so American options also closing options before they expire.
Nadex trades binary options. You want vanilla options. If you trade binary options, your profit is limited so a large move won't provide protection for the full move even if you have the correct option.

***Most options are American style & not European style. American can be closed @ any time but European must be held to expiration.

I've never used Nadex but pretty sure they only trade binary options.

Example:
Binary options>> You buy an option for $500. Price moves 200 pips your profit might be $400 max.
Vanilla options>> You buy an option for $500. Price moves 200 pips your profit might be $2000. Profit is based upon distance of move.
  • #20
  • Sep 24, 2017 7:01pm Sep 24, 2017 7:01pm
Quoting VEEFX
{quote} Thanks again. Which US based broker would you recommend for Vanila options. I am looking for cheap and simple interface to keep my overhead cost to a minimum
My broker has a minimum account size of $10,000 so probably not the best for minimal use.

I think Optionsxpress (Schwab company) is OK. Cost is $3.50/trade for futures options. No platform fees. I've used the platform & it's simple & clear. Better than the one I use.
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