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Forex Options Strangle System

  • #41
  • Dec 2, 2009 9:16am Dec 2, 2009 9:16am
Quoting scattergood
I prefer Ikon because their spreads are only 10 pips

Other brokers have spreads up to 25 pips on the majors for their options.
Ok, but can you backtest on IKON? and How?
Simple is powerful all the time.
  • #42
  • Dec 2, 2009 8:41pm Dec 2, 2009 8:41pm
Quoting RiverTrader
Does anyone here know of any FX Option Broker/ Trading Station that will allow me to place limit/pending orders with Delta or Strike number?

I have Core Option, but it is limit order by premium only, I had no idea to calculate premium, especially when the market is very volatile.

I am not sure I understand the question. you want to set orders when an option at a certain strike reaches a certain delta? If that is the case, no I don't know of a platform that will let you do that, since the option transaction is actually at the premium price, regardless of what the delta is at that time.
  • #43
  • Dec 2, 2009 8:42pm Dec 2, 2009 8:42pm
Quoting RiverTrader
Ok, but can you backtest on IKON? and How?
No, you cannot back test .
  • #44
  • Dec 3, 2009 2:13pm Dec 3, 2009 2:13pm
Quoting scattergood
The combined trade netted me $1400 and the max margin I will use is $2000. I may have to absorb up to another $2000 in trades if I have to roll a 100 pip loss. So I estimate I need to have about $4000-5000 in the account to 'handle' the trade, over and above the premium I collect.

Still that $1400 / $5000 = nearly 30% return....
Hi Scattergood,

Thank you for starting this interesting thread, and for answering the questions. Great job!

I have a quick question too: you refer to 30% profit as to a sure thing. I.e. the way I read it, the matter boils down to rolling the trades. In that cases, where do losses come from?

The way I understood your earlier posts, when the price does get to your strike, you do have to buy the bullet and take a loss (and then open a new trade). Is that correct?

If so, if you have to "absorb" a 100-pip loss (would that be $2K you referred to), wouldn't that loss be larger than the (potential) profit from that particular (unrolled) trade?

Sorry if I misunderstood you, just trying to get to the bottom of it. MANY THANKS!
One Chart is Worth Ten Thousand Words.
  • #45
  • Dec 3, 2009 11:23pm Dec 3, 2009 11:23pm
Quoting Forex007
Hi Scattergood,

Thank you for starting this interesting thread, and for answering the questions. Great job!

I have a quick question too: you refer to 30% profit as to a sure thing. I.e. the way I read it, the matter boils down to rolling the trades. In that cases, where do losses come from?

The way I understood your earlier posts, when the price does get to your strike, you do have to buy the bullet and take a loss (and then open a new trade). Is that correct?

If so, if you have to "absorb" a 100-pip loss (would that be $2K you referred...
Forex007, glad you like the thread and the compliment on it. I am happy to answer questions, so keep them coming.

Let me start by saying, no the 30% return on margin used is NOT guaranteed. Nothing ever is guaranteed. However this system is unlike others in that the main issues it deals with is time and money management and not direction.

One basic assumption that the system tries to take advantage of is this 'prices do not go up for ever or go down for ever' or 'prices move up and down over time'. Losses can come if and when the price of a pair moves straight up or straight down too fast too quickly.

Lets say you have an account with $5000 in it, and the following happens:

1) You sell a 100K EURUSD put at 1.4500 30 days out when the EURUSD is at 1.5000 for 25 pips. Your account now has $5250 in it, but it costs $350 to buy the put back.

2) Two days later the EURUSD is at 1.4500 and the Put you sold now costs 125 pips to buy back. You buy it back and spend $1250, leaving $4000 in your account.

3) You immediately sell the 60 EURUSD Put at 1.3750 for 125 pips making back your $1250. So you have $5250 in you account, but it will cost 135 pips to buy it back.

4) Three days after that the EURUSD drops to 1.3800 and it costs 250 pips to buy the Put you just sold back. You do that and now you have $2750 in your account.

5) You now sell the 1.3000 Put for the EURUSD 180 days out for 250 pips, getting your account back up to $5250, but you now have to wait 4 months.

As long as you have the ability to roll, you are ok. But if the liquidity of the market is such that you cannot roll and the EURUSD falls constantly, ti isn't good. However, of all the things I have learned, the one I can rely on is that prices change in both directions eventually.
  • #46
  • Dec 4, 2009 2:15pm Dec 4, 2009 2:15pm
Quoting scattergood
1) You sell a 100K EURUSD put at 1.4500 30 days out when the EURUSD is at 1.5000 for 25 pips. Your account now has $5250 in it, but it costs $350 to buy the put back.

2) Two days later the EURUSD is at 1.4500 and the Put you sold now costs 125 pips to buy back. You buy it back and spend $1250, leaving $4000 in your account.
Hi Scattergood,

Thank you very much for the detailed explanation. That's how I understood the things to run: at some point the "interim" loss outweigh the initial profit, e.g. with the above scenario, the "temp" loss of $1K is four times bigger than the prior profit of $250.

I can see where the ability to roll comes in useful though...

Have you thought of using options instead of spot FX for "conventional" trading, i.e. you'd trade as you normally would, but open positions using options to get better use of the available funds?
One Chart is Worth Ten Thousand Words.
  • #47
  • Dec 7, 2009 9:23am Dec 7, 2009 9:23am
Quoting Forex007
Hi Scattergood,

Thank you very much for the detailed explanation. That's how I understood the things to run: at some point the "interim" loss outweigh the initial profit, e.g. with the above scenario, the "temp" loss of $1K is four times bigger than the prior profit of $250.

I can see where the ability to roll comes in useful though...

Have you thought of using options instead of spot FX for "conventional" trading, i.e. you'd trade as you normally would, but open positions using options to get better use of the available funds?
Yes the roll is critical. The 'interim' loss will always be bigger than the initial profit, but that isn't important. The ability to roll is the critical factor. Let's say you had the following series of transactions:

+250
-1250
+1250
-2500
+2500
=====
+250

Does the size of the -1250 and -2500 transactions really matter? Not to me as I only need a few thousand dollars to to execute these transactions in margin, thus the +250 is what matters. It may take 6 months for me to 'earn' the profit, but it hopefully comes to the account anyway.

As to you second question, I am not sure I understand. yes I use options on spot forex to trade this system, the margins are what allow me to do so.
  • #48
  • Dec 17, 2009 3:28am Dec 17, 2009 3:28am
Scattergood,

Keeping an eye on this E/U move, just asked Santa for a bounce off 4400 at the wire. At what time does the put expire on the 17th?

If you get a chance, let us know how you are managing this one.

Pulling for you!

VBro
  • #49
  • Dec 17, 2009 11:29am Dec 17, 2009 11:29am
Quoting vbro
Scattergood,

Keeping an eye on this E/U move, just asked Santa for a bounce off 4400 at the wire. At what time does the put expire on the 17th?

If you get a chance, let us know how you are managing this one.

Pulling for you!

VBro
Vbro, thanks a ton for the good wishes. And I have to say you beat me to the punch, I was going to post today about how my trades have resolved.

So, without further adieu, you will see an attached chart with the completion of the EURUSD Strangle. Here is what I did and why I did it:

1) On 11.10.09 I sold a 200K EURUSD 1.5500 Call 12.17.09 Expiry = +45 pips = +$900
2) On 11.18.09 I sold a 200K EURUSD 1.4400 Put 12.17.09 Expiry = +25 pips = +$500
3) On 12.16.09 I bought the 200K EURUSD Put 12.17.09 Expiry = -10 pips = -$200
4) On 12.17.09 200K EURUSD 1.5500 Call 12.17.09 Expiry EXPIRED = 0 pips = $0
5) Total = +60 pips x 2 lots = +$1200

So the big question to answer is why did I just buy back the 1.4400 put? Here is why:

a) When the day closed yesterday, 1 day before expiry of the put, the price was 130 pips from the strike. That was about 1 ATR. The 30 day ATR was at 124 pips. So while not so close, the strike was within spitting distance and the EURUSD could get there.
b) 12.17.09 was a day where US Unemployment was going to be announced, and while I was asleep!
c) If I closed the position I will have captured 60% of the total profit (15 of the 25 pips) for that leg.
d) The EURUSD internals were TERRIBLE. As you can see on the bottom pane of the image, the histogram (the difference in the EUR strength and the USD strength) was negative and falling. Further, the fall was being generated by a RISING USD and a FALLING EUR. So there was a lot of force in the move.

All of the above basically said, why stay in? Staying in would be the same as taking the trade. In other words, if I didn't have a position on, would I have sold the 1.4400 put 130 pips away for 1 day and collect 10 pips? The answer was, no, not given the above situation.

Now, let's look at how profitable this trade was.

1) Net = $1200
2) Max Margin = $2000
3) Loss Reserve = $3000 (being conservative and reserving out 150 pip loss on 200K)
4) Profit Margin = 1200/(2000+3000) = 24% in 32 days.

As I said, this style of trading can be VERY profitable, but it takes a different kind of thinking. The focus is on where the market WON'T go to, and very much on money management. As always, questions or comments are welcome.
Attached Image (click to enlarge)
Click to Enlarge Name: eurusd strangle 12.17 expiry - final.gif Size: 28 KB
  • #50
  • Edited 9:47am Dec 28, 2009 9:36am | Edited 9:47am
Quote
Thanks for starting this thread.

How did you learn this? From books and/or websites? If so, which ones do you recommend.

Keep posting your thoughts and trades on your thread.

I was reading about Bill Lipschutz and his hedge fund. If this method (forex options) is good enough for him, a billionaire, it is good enough for me and you. ;.)

I recieved a few PM's that I thought might be useful for the thread so I am posting my replies to them here. The above is the first one I will address.

I have done a ton of reading on options ever since I came across the fact that 80-90% of them expire worthless. I have read too many books to list them all but I would say some of the better ones are:

Get Rich Trading Options by Lee Lowell (beginner)
Options Made Easy by Guy Cohen (intermediate)
Trading Option Greeks by Dan Passarelli (advanced)

I also recommend poking around website located at: http://www.optionseducation.org/

And yes, Bill Lipschutz is a guy I have come across. His interview in New Market Wizards was very very interesting to me.
  • #51
  • Dec 28, 2009 9:44am Dec 28, 2009 9:44am
Quote
Have you considered the following use of options: say GU is at 1.65 and you don't expect is to surpass 1.75. You go Long at 1.65 AND write a call at 1.75. You net gain is (a) profit on 1.75-1.65 PLUS (b) options premium.

If the price does exceed 1.75, any loss on the option is offset by the gain on your Long positions (which you keep open until you buy the option back or until it expires).

What do you think?

Here is another of the PM's I received that I thought would be interesting to answer in this thread.

What is being described is a covered call. You buy the underlying and sell the call. However, in the description above there is the assumption that the GBPUSD will go up. If it doesn't, you have offset your loss by the amount of the premium.

Basically a covered call caps your total profit to the premium + (strike - entry). Lets say you buy the GBPUSD at 1.6500 and sell the 90 day 1.7500 call for 100 pips. Here are a few scenarios:

a) GBPUSD goes to 1.7500 on 90th day. Your profit is 1100 pips. 100 from the call you sold + 1000 on the GBPUSD move from 1.6500 to 1.7500.

b) GBPUSD goes to 1.9500 on 90th day. Your profit is 1100 pips. 100 from the call you sold + 1000 on the GBPUSD move from 1.6500 to 1.7500. Any money you gain on the GPUSD above 1.7500 is offset by the loss you have on the call you sold.

c) GBPUSD is at 1.6500 on the 90th day. Your profit is 100 pips. You don't make or lose any money on the GBPUSD position, but you keep the 100 pips on the call.

d) GBPUSD is at 1.5500 on 90th day. Your loss is 900 pips. You keep the 100 pips you made on selling the call, but loose 1000 on the GPBUSD position.

I personally don't trade covered calls because fundamentally you still have to be right about the direction of the currency. I prefer to make money by NOT BEING WRONG as opposed to HAVING TO BE RIGHT. However, there are many folks who use covered call positions to lock in profits and offset losses, it is a very fine strategy to use.
  • #52
  • Jan 6, 2010 10:26am Jan 6, 2010 10:26am
Hi Scattergood,

Happy New Year to you!

Have a look at the enclosed file, you may find it of interest.
Attached File(s)
File Type: pdf Slingshot.pdf   406 KB | 908 downloads
One Chart is Worth Ten Thousand Words.
  • #53
  • Jan 18, 2010 12:18pm Jan 18, 2010 12:18pm
Quoting Forex007
Hi Scattergood,

Happy New Year to you!

Have a look at the enclosed file, you may find it of interest.

Yes that document is interesting. However, it discusses going LONG the strangle. Basically they are saying, let's try to pick bottom turning points and put on a strangle because:

1) If we are right, we get a big move up off the bottom and the strangle wins.
2) If we are wrong, we will get more down move past the local low and the strangle wins.

Personally I don't like buying options with very little time in them. I buy options for 12-18 months. Why? Because as an option owner time lessens the value of my option. I want as much time as possible in order to maximize the likelihood of the price move.

It is the exact opposite of why I sell 30-45 day options.
  • #54
  • Jan 18, 2010 1:34pm Jan 18, 2010 1:34pm
Quoting scattergood
Personally I don't like buying options with very little time in them. I buy options for 12-18 months.
If you buy US-style option, it can be exercised any time. So, if you think you identified a top/bottom (or a reversal point - which is, more or less, the same), you can buy an 18-month option, but benefit from the move sooner, say in 2-4 weeks.

Would that work?
One Chart is Worth Ten Thousand Words.
  • #55
  • Jan 18, 2010 1:41pm Jan 18, 2010 1:41pm
Quoting Forex007
If you buy US-style option, it can be exercised any time. So, if you think you identified a top/bottom (or a reversal point - which is, more or less, the same), you can buy an 18-month option, but benefit from the move sooner, say in 2-4 weeks.

Would that work?
Yes and no.

You pay a lot more for the 18 month option, so a move of 2-4 weeks has to be a HUGE move to make up for the 18 months of premium you have spent.

EURUSD 1.4400 Call 2/18/10 expriy (32 days) == 167 pips
EURUSD 1.4400 Call 1/14/11 expriy (361days) == 636 pips

Do you would need something like a 1000 pip move to make a few hundred pips if you owned the long dated call.

On the flip side, you don't even have to exercise. You just sell the call back for a profit, so American vs. European options matter much more if you are a SELLER not if you are a BUYER.
  • #56
  • Jan 18, 2010 2:20pm Jan 18, 2010 2:20pm
Guys and gals,

Sorry I have been away for so long, but the holidays and a few weeks off from serious trading helped clear my mind but gave me too much to do once I got back. But now I am back.

Attached a summary of how the FOSS system has done since I started trading in September of 2009. The table includes completed months, and marked to market, so open trades are taken into account.

The reason for the variablity in the returns is because the options expire at differning points finalizing the last 10 pips of open profit because of the spread.

In the coming posts I'll walk through a recent trade and my reasons for it.

As always comments and questions are always welcome.
Attached Image
  • #57
  • Jan 18, 2010 4:38pm Jan 18, 2010 4:38pm
OK, attached is a chart of my latest EURUSD strangle. To quickly understand what the chart means:

1) The black lines are the Call (above the price) and the Put (below the price). The lines are at the strike prices I sold. The start of the line is where I sold the option and the end of the black line is when it will expire.

2) The vertical red lines are the date that the trade was put on and the date it will expire. It shows the total time of the trade.

3) The horizontal dotted blue lines are interesting support and points that I see. You will notice that the strikes (as shown by the black lines) are above or below the support lines shown by the horizontal dotted blue lines.

4) The purple lines in the price and the indicator areas show one of the key reasons I made this trade, to be explained below.

Ok, here is the mechanics of the trade and my thinking behind it:

a) I entered the following trades;

Sell 200K EURUSD 1.4950 Call 2.18.2010 Expiry @ 47 pips = +$940
Sell 200K EURUSD 1.3700 Put 2.18.2010 Expiry @ 38 pips = +$760

Total: 85 pips = +$1700

Now the max margin I would need for this trade is $2000 if the EURUSD got to any of my strikes.

I am assuming that I need to absorb 125 pips of loss should the EURUSD get to any of my strikes, or $2500. So the total money required for this trade is:

$2000 + $2500 = $4500
$1700 in profit / $4500 reserve (margin + loss absorption) = 37% return

One key thing is the ASSUMPTION of loss absorption. Even if it is 200 pips, it just means I would need $6k in the account, and the return would be around 28%

b) Now why those strikes and why now. Well let's talk about the upper strike first. The custom internals indicator shows that the EUR (red line) was getting stronger and the USD (blue line) was getting weaker and the histogram was moving up. This means that the EUR was strengthening while the USD was weakening and the EURUSD should move up.

And it did for a few days. So I looked up in the price and say two fairly strong resistance lines. They HAD beens support, were broken and have become resistance.

At this time the EURUSD was around 1.4400 so the upper strike was around 550 pips up.

The lower strike I chose the clearest support over the last 6 months. I have a downward bias on the EURUSD and therefore went further out in price, selecting a 1.3700 strike or 700 pips down.

Time will tell how this trade works, but as of now I have about half the profits in the trade. I could buy the entire position back for $840, and keep $860 in profit in about 2 weeks. I'll keep the trade on as I still like it, but you can see the power of time decay in understanding that since the 4th of Jan, the price has gone up and down, but 2 weeks have passed giving me the profits that I care about.
Attached Image (click to enlarge)
Click to Enlarge Name: fxi - short eurusd strangle 02.18.10 expiry.gif Size: 35 KB
  • #58
  • Jan 19, 2010 10:25am Jan 19, 2010 10:25am
Hi,
Quick question, what is that indicator that you use on the bottom of your screen ? I do not understand what it is or how you are using it ?

Thanks,
sckid
  • #59
  • Jan 27, 2010 5:20pm Jan 27, 2010 5:20pm
S-G: Thank you for the posts. As a learning example for us, can you talk about what happened in Nov-09 to get the minus return. Ken.
  • #60
  • Feb 3, 2010 12:44pm Feb 3, 2010 12:44pm
Quoting sckid1108
Hi,
Quick question, what is that indicator that you use on the bottom of your screen ? I do not understand what it is or how you are using it ?

Thanks,
sckid
This indicator is VERY helpful in my trading, so thanks for the question. What it does is this:

1) It measures the strength / weakness of the EUR vs. all other major currencies except the USD. It then plots it in the RED line.

2) It measures the strength / weakness of the USD vs. all other major currencies except the EUR. It then plots it in the Blue line.

3) It then subtracts the them and plots the difference as a histogram.

What I use it for is this:

a) You can clearly see in the price action of the EURUSD what is happening. Is it going up, is it going down, you can basically see the trend.

b) However the indicator tells you WHY the trend is happening. The histogram shows the basic direction of the EURUSD because if the EUR is gaining strength against every other currency, while the USD is losing strength against every other currency, then the EURUSD has to go up.

But what if the EUR is losing strength against every other currency, and the USD is losing MORE against every other currency, well the EURUSD should still go up. And knowing which case is going on gives me the ability to understand the dynamics, and force of a price move in a currency.
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