By John Jagerson, 2 Aug 2007
Having the market stalled like this can be frustrating. We are waiting for a breakout but it is definitely uncertain which direction that will come. The U.S. employment situation report tomorrow is dominating the news landscape and is the most likely catalyst to lead to a break out. There are a few ways to trade that news but most of them carry the danger of a whipsaw. If you hang back and wait for the news to be released and for the market to start to trend there is always the risk of a lost opportunity. There is another alternative - forex options.
An option allows you to speculate on the upside or downside of a currency's movement, it has similar leverage to the spot forex market but it can offer limited risk. If you construct the trade the right way, you can even get away without a stop loss. There is a particular options strategy that I like to use called a long "straddle." The idea is that I can buy two options; one on each side of the market. Although one of the options is sure to be a loser when the market breaks out to one direction or the other, I am counting on the winner to make up those losses and provide excess profit. When the market is trading in such a tight range it is the perfect time to use an option strategy like this because the subsequent breakout can be quite large. I used the same strategy and recorded a video about it on my profitingwithforex site last month on the GBP/USD, which worked out very well.
Here is a specific example that I am entering this week. I will buy a call and a put on the USD/JPY that are "at the money." These will cost me the equivalent of about 150 pips to enter but if the market moves more than 150 pips in either direction over the next two weeks I will have walked away with my entire investment back plus a gain. If the market remains stagnant even after Friday's labor release, I can sell the options back for a small loss. Not a bad way to speculate on major announcements without having to worry about whipsaws because the absolute maximum I can lose is the amount I invested in the first place.
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USD/JPY Source: MetaStockProFX
Having the market stalled like this can be frustrating. We are waiting for a breakout but it is definitely uncertain which direction that will come. The U.S. employment situation report tomorrow is dominating the news landscape and is the most likely catalyst to lead to a break out. There are a few ways to trade that news but most of them carry the danger of a whipsaw. If you hang back and wait for the news to be released and for the market to start to trend there is always the risk of a lost opportunity. There is another alternative - forex options.
An option allows you to speculate on the upside or downside of a currency's movement, it has similar leverage to the spot forex market but it can offer limited risk. If you construct the trade the right way, you can even get away without a stop loss. There is a particular options strategy that I like to use called a long "straddle." The idea is that I can buy two options; one on each side of the market. Although one of the options is sure to be a loser when the market breaks out to one direction or the other, I am counting on the winner to make up those losses and provide excess profit. When the market is trading in such a tight range it is the perfect time to use an option strategy like this because the subsequent breakout can be quite large. I used the same strategy and recorded a video about it on my profitingwithforex site last month on the GBP/USD, which worked out very well.
Here is a specific example that I am entering this week. I will buy a call and a put on the USD/JPY that are "at the money." These will cost me the equivalent of about 150 pips to enter but if the market moves more than 150 pips in either direction over the next two weeks I will have walked away with my entire investment back plus a gain. If the market remains stagnant even after Friday's labor release, I can sell the options back for a small loss. Not a bad way to speculate on major announcements without having to worry about whipsaws because the absolute maximum I can lose is the amount I invested in the first place.
If you found this story helpful, please vote for it on the left!
http://www.pfxglobal.com/images/john/usdjpy822007.png
USD/JPY Source: MetaStockProFX
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