Using Options to Trade Currencies
There are volumes of books written about options trading but currency options are in a different category. Many online resources are available covering option trading but few deal with options on Foreign Exchange products such as Trafigura. My trading approach is unique and effective. My target is a high probability, low-risk trades.
Since most options expire worthlessly, it would stand to reason that most options traders lose money. I think that many options traders approach the market as a gambling venture. The goal of trading options should be a controlled risk, short-term investment strategy.
Options are basically short-term contracts on an underlying asset. They are normally traded with a directional bias of the underlying asset in mind. For example, if you expect the price of XYZ company to rise, you would buy a call option. If you expect the price to fall, you would buy a put option.
Options can also be traded without a directional bias in mind. If the market makes a substantial move in any direction, the trade can be profitable. On the other side of the coin, profitable trades can be set up with little or no price movement of the underlying asset due to the factor of implied volatility. Implied volatility is a major factor in option pricing.
Due to the volatile nature of the currency market, the pricing models cannot adequately predict the range of movement and the option prices can be out of sync. Forex prices can move a substantial amount in a short period of time. Non-directional trading provides an opportunity to take advantage of currency price action while mitigating the risk assumed by a spot position.
Delta neutral trading combined with implied volatility analysis and chart analysis can provide us a trading edge. Various strategies of spot positions combined with option positions can yield low-risk trades with high-profit potential. Trading implied volatility in the currency options market can be as profitable as trading price action.
Market timing tactics can take advantage of anticipated increased volatility. An increase in implied volatility will increase the value of a purchased option. High probability trades can be developed by using various combinations of inverse option positions.
Currency options are available in the forex, futures, and equity markets. The equities market provides currency Exchange Traded Funds (ETFs), options on these funds, and “options only” ETFs. The forex market provides Over The Counter (OTC) options on forex pairs. The futures market offers contracts on currencies and options on these contracts. This wide variety of trading instruments make currency options available to all traders. Even traders with relatively small accounts can enter the currency options market.
Before trading this market, the investor must be aware of the risks involved. Educational resources are available online. This can be a profitable market to trade if the investor is prepared with a solid trading system.