I'm reading some old posts here and need a place to write some things down.
COT allocation - commitment of traders
open interest - have seen this in futures feeds
IFR rumors - my oanda account has IFR on it
IFR levels for option expire, where do i get this info? Bloomberg?
Time & Sales - again futures
Futures DOM
6 letters at top of chart - the chart is more than just a bunch of bars, it's a reflection of two different economies and their currency valuations in relation to each other.
USD Key Rates (from bloomberg)
CURRENT1 MO PRIOR3 MO PRIOR6 MO PRIOR1 YR PRIOR
Fed Funds Rate0.150.160.200.220.17
Fed Reserve Target Rate0.250.250.250.250.25
Prime Rate3.253.253.253.253.25
US Unemployment Rate8.909.009.809.609.70
1-Month Libor0.250.260.260.260.25
3-Month Libor0.310.310.300.290.28
"they can afford to commit up to 33 yards defending it before the defense costs them more then they would save with the option. They likely aren't committing that much (or anywhere close). I'd guess they have 4 or 5 yards committed to he task. Once they lose the 100m on the option, doing anything else is just throwing good money after bad. Their stops are hiding just beyond the option strike..."
what are yards?
Yards = Billions
And yes that on a 100m option. a $1m position held for 30 pips = $3000.
100m / $3000 = 33,000.
Anyone find a rumor on the size of that option?
On the defense math look at it like this... $1,000,000 position = $100/pip.
Now pretend you have $100m on the line with that option. How much money would you be willing to commit to saving that $100m?
My guess is 10-15% of the option value, so $10-15m.
Divide that by the number of pips you want in your buffer ahead of the option and you can get an estimate of size.
30 pips at 15% of 100m would give you 5 Yards of operating capital for defense. It may be more or less, but if I was trading it thats what I would want....
(and yes Scotty, thats 500k per pip)
How did DS know there was a option hunt going on?
The first tip off was the fomc decision. The rejection of 3800 was the clue there was an option there. Once I knew it was there, then I started looking for clues that someone was hunting.
The volicity of price movement in what should have been an illiquid market was the tipoff at 12am. This is what the DOM watching experience will get you...
Its still all about where money will be moving IN THE FUTURE.
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Quote:
Originally Posted by Darkstar
Its still all about where money will be moving IN THE FUTURE.
I'm tempted to think you're being tricky here, but I'm pretty sure what you're saying is very simple. To make a profit in trading you have to have a very good sense of what traders are going to do, or be forced to do, to move price away from where you entered. The point is to identify the motivating factors and to gain your position in the market before those future orders flow in. This might be to obvious for everybody here, but don't forget the title of the thread
Am I correct in keeping it this simple? Scotty > < Darkstar
If I'm correct, then I think it would be worthwhile to focus on entering the market safely via orderflow understanding and mechanics. If you give me the green light on the question above, I'd be happy to share some ideas and perspectives I have so we can disect my thinking even more.
I think it would also be very interesting to look some TA methods that get closest to the heart of orderflow. I have many ideas on this.
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EU
With the market so short, any real movement above this current range is going to shake a lot of the weak shorts out. That coupled with new money flowing in, prices will naturally rise. The question becomes, what kind of news/annoucment can convince the sidlined money to trickle back in? I'm not the best at following FA, does anybody know about dates for Greece announcments?
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Good lord. Now every time someone sees a meaningful price move they are going to call it a stop hunt....
This was no stop hunt. We got 2 moderatly bad numbers out of the euro, and 2 really good numbers out of the US. This is noting more then basic event flow.
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Does anyone know if all the options reported by IFR are barriers? Also, IFR gives you the maturity dates for differant options, do the options expire or mature at the end of the trading day or at some unknown specific time?
Today, the closest option is @ 3650, it's payout is 200M. Darkstar, are all options defended or only barriers?
I understand basic vanilla options where you have either a put or call hinged on a certain price where you as the option holder can choose to execute the option to buy or sell at the agreed price on or before expiry. With this understanding, it would make no sense to defend the option because if you lose you're only taking a loss on the option premium. I'm just trying to clear this up and verify what I understand to be true.
If the option that expires today up at 3650 is a barrier, would it NOT make sense to try and play the defensive stop move since we are so close to that price along with the fact that Trichet will be speaking shortly? Anything he says about Greece will probably move the markets, if he says something that induces buying the option won't have a chance anyways. So I guess the question is, are quiet non news times the best for the option defense trade?
Edit...If the 3650 option that is reported by IFR is a barrier, wouldn't it already be dead anyways? I say this simply because the market has already printed through this price. Why would IFR report an option that was already dead?
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forex options:
from wikipedia:
The FX options market is the deepest, largest and most liquid market for options of any kind in the world.
Most of the FX option volume is traded OTC and is lightly regulated, but a fraction is traded on exchanges like the International Securities Exchange, Philadelphia Stock Exchange, or the Chicago Mercantile Exchange for options on futures contracts.
The global market for exchange-traded currency options was notionally valued by the Bank for International Settlements at $158,300 billion in 2005.
....Corporations primarily use FX options to hedge uncertain future cash flows in a foreign currency.
The general rule is to hedge certain foreign currency cash flows with forwards, and uncertain foreign cash flows with options.
...Suppose a United Kingdom manufacturing firm is expecting to be paid US$100,000 for a piece of engineering equipment to be delivered in 90 days.
....Assuming that the cash flow is certain, the firm can enter into a forward contract to deliver the US$100,000 in 90 days time, in exchange for GBP at the current forward rate. This forward contract is free, and, presuming the expected cash arrives, exactly matches the firm's exposure, perfectly hedging their FX risk.
...Using options, the UK firm can purchase a GBP call/USD put option (the right to sell part or all of their expected income for pounds sterling at a predetermined rate), which will:
protect the GBP value that the firm will receive in 90 day's time (presuming the cash is received)
cost at most the option premium (unlike a forward, which can have unlimited losses)
yield a profit if the expected cash is not received but FX rates move in its favor
from investopedia
Options in FOREX are especially prevalent during important economic reports or events that cause significant volatility (when cash markets have high spreads and uncertainty).
You suspect this [,in the example,] volatility will occur within the next two months, but you don't want to risk a cash position [where you have to buy and thus risk the entire, leveraged amount of the underlying symbol], so you decide to use options....
to buy two lots of EUR/USD at 1.3000 in one month; such a contract is known as a "EUR call/USD put."
the buyer loses only the premium.
The premium varies, according to the strike price and date of the option, so the risk/reward ratio varies.
...[this] option will cost [i.e., the premium is, in the example,] 10 pips ... .
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The whole point of the attack is to take out the barrier. The trade is a stop hunt for you, me and anyone else helping the attackers but the attackers only care about the barrier.
For an example, Lets say I sell you a 200m DNT at 3600 and 3800. You get paid if the price remains within the range. I don't want to pay you the 200m, so I try to push price around until I can pierce one of those barriers. The second its pierced, I save 200m and you lose your premium.
Now think about that for a min... Where does the "rumor" on IFR come from? What happens to our trading objectives once that barrier is pierced? Applying what we know about market liquidity and the size of the positions accumulated during this battle, how can we liquidiate?
Figuring all this out is a simple game theory exercise once you understand whats going on...
some more content gleaned from other posts that I want to keep track of:
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The one theme that runs through all these is future market flows. As long as I have a valid reason why traders will join me, (at some point in the future) I can trade. - DS
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Future market flows. I assume he means the flow of capital in or out of a economy. Why does capital flow in and out of economies? To seek highest returns in more stable times and safety in more turbulent times.
So the first question is, what determines rate of return in a specific economy? Interest rates?
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If nobody has noticed, I've had en epiphany when it comes to orderflow and value. Value is not fixed, it is not one price. Value when it comes to trading has to do with the sign of the position (long or short). I have for the most part forgotten about the micro trades, orderflow in it's most powerful sense is a long term mindset. Investors want a probable bet, and they look long term. The answer has been hiding in news stories that speak of investors unwinding their carry trades. Investors will continue buying a currency as long as nothing major changes in a relationship between two countries and there is interest to be made. Investors not only have incentive to buy the "safe" bet when they make interest on trades, but to buy in unison as well. In working together they move rates over time in their own favor and collect interest along the way. The downside to the practice is in unwinding trades and eating into rate change profits, but the collected interest along the way compensates for this to a degree. As the trade fundamentally remains safe, and there is interest to be made, buying will continue. This is why, in my humble opinion, that trends in the fx market don't follow a Gaussian distribution. The trend will remain intact as long as interest is paid, other than occasional squeezes and bluffs. This is how successful traders have the ability to predict rates so far out and why they have the confidence to let trades run for YEARS if the fundamentals support it.
I have more to say about all this, but I thought it was time to revive this thread, or at least input a new, truly common sense approach to orderflow.
Looking long term, trade calls will be few, but if no big news comes out regarding EU through the week before Friday, I think we'll see a strong rebound off of 1.3750. I am pulling that number out of thin air, but I see the "25's" in price as significant "landmarks." if 1.3750 doesn't catch the market, and no big news that would affect a long term trader (interest rates, or EU debt) then I think 1.35 will.
Good trading to all,
Jim
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great attachment bemac. one thing you are underestimating is the CPI, though. employement situation is important, and you have that covered, but CPI is even more important than employement. currency trading (on a fundamental level) is all about interest rates. two things drive interest rates: inflation and employement. back in the 70's, economists were all about employement. but we have learned since then, and now economic theory puts more weight on the inflation. bernanke's (and Trichet and the rest of the central bank heads) main focus is inflation, have a read of his book 'inflation targeting' and that will be ultra clear, and therefore the market's focus is on inflation. anyway, this is a long way of saying 'its all about the CPI'. - merlin
Been going through "The Way of the Dollar" again this month. As well as more Darkstar posts, and a book on basic econ. Feeling a bit of information overload. I feel like I am doing the same things I was when I started trading, only instead of consuming everything I could about technicals then, it's now switched to everything non-technical.
So I am trying to understand something I have read in TwotD. He talks about what he believes to be the fundamental driving force behind movements in markets, the urge to maximize total return.
So I got to thinking, on a very basic level, around interest rates. If I were to take into account interest rates only, I would assume the following; 1.) that interest rates in Europe are higher than in the U.S. right now, and 2.) that this would cause capital to leave the U.S. and flow to the Eurozone, seeking higher returns.
So what does that mean to exchange rates? Ok, I have a pile of dollars, and a pile of euros. If I sell dollars to buy euros so I can invest in Eurozone, that would cause the dollars value to fall while the euros value would rise? What does that look like on the Eur/Usd chart? I think it would mean a rise in the EU chart, because people would be selling dollars to buy euros.
I know there are lots of other things to think about, like risk on risk off attitude due to current events. I am also NOT trying to predict interest rates to forecast currency moves for trade ideas. Just trying to get a better understanding of capital flows and what drives them.
Before I can solve a problem I must state it to myself. When I think I have found the solution I must prove I am right. I know of only one way to prove it; and that is, with my own money. - JL
This just stood out to me. It made me realize I am depending way to much on other people here for guidance, as opposed to stating perceived problems to myself, looking for solutions and testing those solutions.
I need to work through this journey on my own now, I feel like I have gotten everything I can from others here at this point in my development.
