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How FX options can affect spot price heading in to expiration

  • #41
  • Oct 17, 2013 6:08am Oct 17, 2013 6:08am
That is one hell of a model you have yourself there srmfx. Options pricing depends on volatility. You know there is more than one type of volatility, and there are more variables that go into it. I'm not sure what you mean when you say "I don't remember the time decay", but lets stop here though.

To the OP, sorry to somewhat derail the thread. The OTC fx option trade stuff is good to keep an eye on for sure, if you can get the info. I'll leave it there, wouldn't recommend a methodology around plain vanillas or anything.
  • #42
  • Oct 17, 2013 6:41am Oct 17, 2013 6:41am
No worries. There is a method involving the order structure around these large options and trading with sentiment, towards the option. Hard to do on E/U in the first posts bc both Euro and Usd had negative sentiment with their respective political problems.

I'm waiting to post the next large option and go over it.. Usd weakness is dominating strong today. Aud/Usd has ripped through a couple option barriers at .9550 and .9600. Defenders of those barriers didnt stand a chance!
  • #43
  • Edited 7:16am Oct 17, 2013 7:03am | Edited 7:16am
Quoting EmeraldEyes
No worries. There is a method involving the order structure around these large options and trading with sentiment, towards the option. Hard to do on E/U in the first posts bc both Euro and Usd had negative sentiment with their respective political problems. I'm waiting to post the next large option and go over it.. Usd weakness is dominating strong today. Aud/Usd has ripped through a couple option barriers at .9550 and .9600. Defenders of those barriers didnt stand a chance!
Yes USD is taking quite the beating. AUD has been pretty much the strongest currency lately, with this rally makes me think we see highs in equity indices here, but futures haven't moved much overnight. I think many are positioned for weak USD data as well as now with the US gov antics, the FED will not be tapering until into 2014 and this is year end time for funds.

Wondering wether to buy this dip on USD/JPY actually. big 98's and a 97.50 digital.
  • #44
  • Oct 17, 2013 7:14am Oct 17, 2013 7:14am
Quoting chucklots
That is one hell of a model you have yourself there srmfx. Options pricing depends on volatility. You know there is more than one type of volatility, and there are more variables that go into it. I'm not sure what you mean when you say "I don't remember the time decay", but lets stop here though. To the OP, sorry to somewhat derail the thread. The OTC fx option trade stuff is good to keep an eye on for sure, if you can get the info. I'll leave it there, wouldn't recommend a methodology around plain vanillas or anything.
Of course volatility is not the only factor affecting the options prces. If I want to trade the price I use spot positions and the leverage that binary options provide. With plain vanillas and binaries I trade predictable changes in volatility as well as time decay. The expiry of large options is one of the times when you can expect change in volatility from low to high.
  • #45
  • Oct 17, 2013 7:34am Oct 17, 2013 7:34am
Quoting srmfx
{quote} Of course volatility is not the only factor affecting the options prces. If I want to trade the price I use spot positions and the leverage that binary options provide. With plain vanillas and binaries I trade predictable changes in volatility as well as time decay. The expiry of large options is one of the times when you can expect change in volatility from low to high.
Come on man, stop it.
  • #46
  • Oct 17, 2013 8:03am Oct 17, 2013 8:03am
Quoting chucklots
{quote} Come on man, stop it.
chucklots, options are complex and it is normal to discuss this topic. I doubt that if you and I share experience will do harm to anyone.
  • #47
  • Oct 17, 2013 8:29am Oct 17, 2013 8:29am
Quoting srmfx
{quote} chucklots, options are complex and it is normal to discuss this topic. I doubt that if you and I share experience will do harm to anyone.
Yes they are complex and I am not an options trader, but I know enough to know that what you are saying you do/did, will not work. What is the R/R and payouts on these? Did you hedge these trades?

And theta (time decay) works against you when you're long strangles.

This thread is going off topic here. It is about how large plain vanillas affect spot.
  • #48
  • Oct 17, 2013 8:59am Oct 17, 2013 8:59am
Quoting chucklots
{quote} Yes they are complex and I am not an options trader, but I know enough to know that what you are saying you do/did, will not work. What is the R/R and payouts on these? Did you hedge these trades? And theta (time decay) works against you when you're long strangles. This thread is going off topic here. It is about how large plain vanillas affect spot.
I shared my experience because I'm a trader and everything should be practical. It's not OK just to know that the options affect the spot market. You have to know what you can do if there is a large option expiry. Otherwise your knowledge is worthless.
I trade options in 90% of the cases and I have experience woth options as risk manager just before and after 2008. Time decay is negative for long options positions, but that doesn't mean that you should be scared of this fact. The best solution for the time decay is to pick the right expiry and time of entry. Also when I trade expected increase of volatility, vega is so high that the negative theta is not a problem at all. I'll stop here, because this is really not for this thread.
  • #49
  • Oct 17, 2013 9:19am Oct 17, 2013 9:19am
Quoting srmfx
{quote} I shared my experience because I'm a trader and everything should be practical. It's not OK just to know that the options affect the spot market. You have to know what you can do if there is a large option expiry. Otherwise your knowledge is worthless. I trade options in 90% of the cases and I have experience woth options as risk manager just before and after 2008. Time decay is negative for long options positions, but that doesn't mean that you should be scared of this fact. The best solution for the time decay is to pick the right expiry...
what you do is wait for the "large expiry" to expire as you can expect chop if nothing else is going on.

vega = volatility, in terms of options risks.

You still haven't answered the important questions I had in my last post.

You were trading intraday plain vanillas, long strangles around option expiries as a risk manager during 2008? For who? This is getting better... If you stop now and admit you're lying it will be cool I promise.
  • #50
  • Oct 17, 2013 9:20am Oct 17, 2013 9:20am
Quoting srmfx
{quote} Of course volatility is not the only factor affecting the options prces. If I want to trade the price I use spot positions and the leverage that binary options provide. With plain vanillas and binaries I trade predictable changes in volatility as well as time decay. The expiry of large options is one of the times when you can expect change in volatility from low to high.
What do you mean by leverage provided by binary options? I would of thought that the actual leverage/gearing available was higher when using spot. No disrespect intended but aren't you basically just doing the equivalent of spread betting via trading daily binaries? The prices quoted to you may be somewhat based on historic/implied volatility but your counter party (the broker) is always going to add a premium on top of this. Due to the fact that you're only ever selling your OTC option back to your broker means they can pretty much make up whatever premium they like once you're in the trade and it makes it difficult for you to see how competitive they are being with their prices as they are providing the entire market on your option chain.

In short, why are you not trading via GLOBEX if you have a risk management/options background?
  • #51
  • Oct 17, 2013 9:24am Oct 17, 2013 9:24am
Quoting TranceTrader
{quote} What do you mean by leverage provided by binary options? I would of thought that the actual leverage/gearing available was higher when using spot. No disrespect intended but aren't you basically just doing the equivalent of spread betting via trading daily binaries? The prices quoted to you may be somewhat based on historic/implied volatility but your counter party (the broker) is always going to add a premium on top of this. Due to the fact that you're only ever selling your OTC option back to your broker means they can pretty much make...
Gambling is what he is doing, with horrible R/R.
  • #52
  • Oct 17, 2013 9:35am Oct 17, 2013 9:35am
Quoting chucklots
{quote} what you do is wait for the "large expiry" to expire as you can expect chop if nothing else is going on. vega = volatility, in terms of options risks. You still haven't answered the important questions I had in my last post. You were trading intraday plain vanillas, long strangles around option expiries as a risk manager during 2008? For who? This is getting better... If you stop now and admit you're lying it will be cool I promise.
Do you ask me something or just try to argue? Options are complex and you can learn them only if you trade them. As risk manager I had the chance to trade with on of the biggest bank. They don't trade daily options, but you can choose from KI forwards, collars, TRFs (or TARNs), even if you create your own options structure. I may say whatever you want, but the numbers speak pretty clear if I've done my job well. I'm just trying to help the others in this low volatility environment (today it's OK).
RR is from 1/3 to 1/20. If I trade volatility the structures are delta neutral.
  • #53
  • Oct 17, 2013 9:42am Oct 17, 2013 9:42am
Quoting TranceTrader
{quote} What do you mean by leverage provided by binary options? I would of thought that the actual leverage/gearing available was higher when using spot. No disrespect intended but aren't you basically just doing the equivalent of spread betting via trading daily binaries? The prices quoted to you may be somewhat based on historic/implied volatility but your counter party (the broker) is always going to add a premium on top of this. Due to the fact that you're only ever selling your OTC option back to your broker means they can pretty much make...
Globex just don't have the options I need. The leverage may not be the right word. If you trade the spot and the price moves 5 pips, you make 5 pips profit. With binari option the price may move 5 pips, but you can make 20 pips profit. Of course there is the other side of the coin. The price may move 100 pips, but you still make 20 pips profit. The trick is to know where to trade spot and when options. If the volatility si OK, the spot is better. If the volatility is low the options are better.
  • #54
  • Oct 17, 2013 9:49am Oct 17, 2013 9:49am
Quoting srmfx
{quote} Do you ask me something or just try to argue? Options are complex and you can learn them only if you trade them. As risk manager I had the chance to trade with on of the biggest bank. They don't trade daily options, but you can choose from KI forwards, collars, TRFs (or TARNs), even if you create your own options structure. I may say whatever you want, but the numbers speak pretty clear if I've done my job well. I'm just trying to help the others in this low volatility environment (today it's OK). RR is from 1/3 to 1/20. If I trade volatility...
How do you delta hedge a binary option?
  • #55
  • Oct 17, 2013 9:49am Oct 17, 2013 9:49am
Quoting chucklots
{quote} Gambling is what he is doing, with horrible R/R.
You've joined FF 11 hours ago, which makes me doubtthat you are here to learn something about trading or share experience. This is the best trading forum and please don't try to spoil it. If I'm wrong and you want to learn something, just ask.
  • #56
  • Oct 17, 2013 9:52am Oct 17, 2013 9:52am
Quoting TranceTrader
{quote} How do you delta hedge a binary option?
Binary options are hedged as spreads. You need to hedge the delta if you want to trade volatility or time. When I trade my STE set up I enter in the direction of the trend after a pullback. This is directional trade and I don't hedge the delta. If I trade volatility I use the simplest way for delta hedging - buy or sell simoultaneously put and call with the same delta.
  • #57
  • Oct 17, 2013 9:56am Oct 17, 2013 9:56am
Quoting srmfx
{quote} Do you ask me something or just try to argue? Options are complex and you can learn them only if you trade them. As risk manager I had the chance to trade with on of the biggest bank. They don't trade daily options, but you can choose from KI forwards, collars, TRFs (or TARNs), even if you create your own options structure. I may say whatever you want, but the numbers speak pretty clear if I've done my job well. I'm just trying to help the others in this low volatility environment (today it's OK). RR is from 1/3 to 1/20. If I trade volatility...

That's great you're trying to help others, but you make no sense from where I'm sitting. I am trying to grasp what your saying but it's just nonsense.

I said lets keep this thread on topic but you insist on pushing the fact that you were a risk manager trading daily vanillas, not saying where this is possible, then saying you didn't trade daily vanillas... wtf.
  • #58
  • Oct 17, 2013 10:01am Oct 17, 2013 10:01am
Without reliable data options are useless.
The links posted here are second hand retail sites at best.
It has been touched on but most options in the market are hedged positions. I'm not going to go into detail about what that means but trading off poor 2nd hand option data is extremely dangerous.
  • #59
  • Oct 17, 2013 10:02am Oct 17, 2013 10:02am
Quoting chucklots
{quote} That's great you're trying to help others, but you make no sense from where I'm sitting. I am trying to grasp what your saying but it's just nonsense. I said lets keep this thread on topic but you insist on pushing the fact that you were a risk manager trading daily vanillas, not saying where this is possible, then saying you didn't trade daily vanillas... wtf.
I agreed that this is not the thread to discuss options trading. I post trades in my thread, where I explain why they were made, etc. Options are complex and if we discuss the topic just theorretically misunderstandings are normal.
  • #60
  • Oct 17, 2013 10:03am Oct 17, 2013 10:03am
Quoting srmfx
{quote} Binary options are hedged as spreads. You need to hedge the delta if you want to trade volatility or time. When I trade my STE set up I enter in the direction of the trend after a pullback. This is directional trade and I don't hedge the delta. If I trade volatility I use the simplest way for delta hedging - buy or sell simoultaneously put and call with the same delta.
Okay that makes some sense. Presumably you don't need to hedge anyway because the risk/reward is asymmetric on binaries unlike vanilla options and there is no volatility risk. I don't understand how buying/selling the same option put/call is the best delta hedge.. doesn't that just mean your flat because volatility will increase symmetrically for both your sell & buy options. I would of thought hedging via spot/futures would be best if you're doing a volatility play?
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