Can carry trade interest pay for long option premium? | Forex Factory

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Can carry trade interest pay for long option premium?

  • #1
  • First Post: Jul 20, 2013 4:10pm Jul 20, 2013 4:10pm
Is it possible to go long a carry pair like AUD/USD via a long call and have the premium for the option paid for by the carry interested earned? In other words, this would make it possible to hold a free position. Or has this already been priced in the option premium?
  • #2
  • Jul 20, 2013 6:46pm Jul 20, 2013 6:46pm
There are still brokers that offer FX options? Last I heard, there wasn't enough demand and most places stopped offering them.
Play the players, not the cards.
  • #3
  • Jul 21, 2013 12:16am Jul 21, 2013 12:16am
As you are purchasing an option to buy an instrument at some point in the future, then you will not own it until the expiry time, if you exercise the option. So I don't see that you can receive interest for the period that you don't own the instrument.
Please Do Not PM Me With Coding Enquiries
  • #4
  • Jul 21, 2013 9:06am Jul 21, 2013 9:06am
Quoting Gumrai
As you are purchasing an option to buy an instrument at some point in the future, then you will not own it until the expiry time, if you exercise the option. So I don't see that you can receive interest for the period that you don't own the instrument.

That's what I thought until I read this line in Hedge Fund Wizards:
Quote
We did a lot of our trades through options—
positions like buying calls in currencies with a carry because the positive carry paid for your option.

This is from the interview with Macro trader Colm O'Shea. I am guessing these might be options that retail traders do not have access to? But apparently it can be done.
  • #5
  • Jul 21, 2013 11:21am Jul 21, 2013 11:21am
someone correct me if I'm wrong, but there's no carry in the derivatives trade - if you want the benefit of carry you'd need to be trading directly the spot fx or swaps.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #6
  • Jul 21, 2013 11:31am Jul 21, 2013 11:31am
Quoting The Fool
someone correct me if I'm wrong, but there's no carry in the derivatives trade - if you want the benefit of carry you'd need to be trading directly the spot fx or swaps.
That's why I don't get how ColmO'Shea is able to place these trades for his hedge fund.
  • #7
  • Jul 21, 2013 2:05pm Jul 21, 2013 2:05pm
Yes, carry can help offset the cost of the option (it's not actual physical carry, in this case, but rather the term structure of the forwards that is implied by the positive carry). It's relatively rare, however, that this carry fully offsets the cost of the optionality, as that would be a free lunch. Still, it happens sometimes and there are some markets even now where this is the case (very hard to take advantage of). And no, to my knowledge, AUDUSD isn't one of these mkts.
  • #8
  • Jul 21, 2013 3:57pm Jul 21, 2013 3:57pm
Quoting Martinghoul
Yes, carry can help offset the cost of the option (it's not actual physical carry, in this case, but rather the term structure of the forwards that is implied by the positive carry). It's relatively rare, however, that this carry fully offsets the cost of the optionality, as that would be a free lunch. Still, it happens sometimes and there are some markets even now where this is the case (very hard to take advantage of). And no, to my knowledge, AUDUSD isn't one of these mkts.
Martinghoul, thank you for this. Do you know the mkts where this is still possible?
  • #9
  • Jul 21, 2013 6:17pm Jul 21, 2013 6:17pm
i actively trade forex options.... there should be several posts of mine on the subject..... can never ever remember noticing receiving or paying swap/interest on any trade.... options just don't entitle you to interest or dividends.....

half suspect what o'shea meant by buying calls in currencies with a carry was they were long the audusd by spot trades and at the same time were long via calls.... so the carry trade help out with the price of a call.....

such as, being long 10 standard lots of audusd and being long 2 'aum' calls..... using the swap to cover much of the long calls cost....... 'aux' moves inverse of the spot price so it could not be used and also the bid/ask spread will kill ya..... the spread on the 'ndo' is equally high......

for this to work the swap would need to be high and the trades lengthy.....h
to trade and code, keep both simple... no call to impress....h
  • #10
  • Jul 21, 2013 7:33pm Jul 21, 2013 7:33pm
Quoting hayseed
i actively trade forex options.... there should be several posts of mine on the subject..... can never ever remember noticing receiving or paying swap/interest on any trade.... options just don't entitle you to interest or dividends.....
right, there's no outright swap via derivatives because you are not buying/selling the underlying, only the right to buy/sell...
"If The Fool persists in his Folly he will become wise." - William Blake
  • #11
  • Last Post: Aug 18, 2013 5:08am Aug 18, 2013 5:08am
Quoting fxterrapin
{quote} Martinghoul, thank you for this. Do you know the mkts where this is still possible?
Well, long dated options that involve the traditional funding currencies (e.g. JPY and CHF) is where this generally holds.

And no, a trade that Colm was describing doesn't involved buying spot and using the actual carry to offset the cost of the option as someone has suggested. That would be rather silly. It means simply the following (these numbers aren't real): say I buy 2y CHFNOK 6.0 puts; the ATM fwd is at 6.625 mid and the option costs 1.5%. Suppose, for whatever reason, with the 1y ATM fwd at 6.495, the 1y 6.0% puts currently cost the very same 1.5%. In this case, the "slide" (could be both in the term structure of the fwds and the vol) entirely pays for 1y of holding the option, making the optionality "free".

In reality, you generally need to go further out and use some really juicy EM crosses to get such an effect. Free lunches are not common.
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