FX Options. Dan Juhl Larsen FX Options trader at Saxo Bank. Moscow 19 Marts 2014

Transcription

1 FX Options Dan Juhl Larsen FX Options trader at Saxo Bank Moscow 19 Marts June 2013

2 Disclaimer None of the information contained herein constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy. This material is produced for marketing and/or informational purposes only and Saxo Bank A/S and its owners, subsidiaries and affiliates whether acting directly or through branch offices ( Saxo Bank ) make no representation or warranty, and assume no liability, for the accuracy or completeness of the information provided herein. In providing this material Saxo Bank has not taken into account any particular recipient s investment objectives, special investment goals, financial situation, and speci fic needs and demands and nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and Saxo Bank assumes no liability for any recipient sustaining a loss from trading in accordance with a perceived recommendation. All investments entail a risk and may result in both profits and losses. In particular investments in leveraged products, such as but not limited to foreign exchange, derivatives and commodities can be very speculative and profits and losses may fluctuate both violently and rapidly. Speculative trading is not suitable for all investors and all recipients should carefully consider their financial situation and consult financial advisor(s) in order to understand the ri sks involved and ensure the suitability of their situation prior to making any investment, divestment or entering into any transaction. Any mentioning herein, if any, of any risk may not be, and should not be considered to be, neither a comprehensive disclosure of risks nor a comprehensive description of such risks. Any expression of opinion may be personal to the author and may not reflect the opinion of Saxo Bank and all expressions of opinion are subject to change without notice (neither prior nor subsequent). This disclaimer is subject to Saxo Bank's Full Disclaimer available at 2

3 Content of the day How to trade FX Options in Saxo Trader Examples on investing via FX Options Delta hedging / Gamma Scalping FX Options Reports (Controlling Risk) 3

4 SaxoTrader: How to trade FX Options Forex Options Trade This will open a Trade window Details of the FX Option Pre-margin calculation Greek values 4

5 SaxoTrader: How to trade FX Options Trade confirmation Now you know that the trade is executed. Under open positions you will then see the trade under Forex Vanilla Option. You will see: Trade details Open/Close price Profit/Loss 5

6 Case Studies USDJPY XAUUSD EURUSD Outlook for the currencypair: Macro Technically How can we capitalize on the specific outlook. 6

7 Case studie: USDJPY 7

8 Outlook: USDJPY Background Current spot price is , where next? Overall still bullish USDJPY Carry trade. Japan running huge decifits. What speaks against a higher USDJPY Increased global risk aversion. Market already short JPY. 8

9 9 Outlook: USDJPY Possible way to play the current senario.

10 Outlook: USDJPY Possible way to play the current senario. We are going to buy a USDJPY call option to play the bullish USDJPY spot view. Details can be found in the Forex Options Trade window. USDJPY call Expiry 02 mar 2015 Amount: 1,000,000 Price: 2.89 (28,140 USD) (spot ) Breakeven:

11 Outlook: USDJPY Possible way to play the current senario. Lets take a look at the profit/loss at different outcomes. Spot Profit/loss ,800 USD ,180 USD Zero (Breakeven) ,140 USD (premium) ,140 USD (premium) Important to know that your max. loss is limitet to the premium paid, but your potentiel profit is unlimited. No need for a stop. 11

12 Outlook: USDJPY Possible way to play the current senario. Alternative to buying the option: Buy spot at Stop 2.89 away = (same risk as the prem.) Spot Profit/loss ,350 USD ,900 USD ,140 USD So, the profit will be larger if the investor is chooses to put the money in FX Spot, and is right. Should spot go to before it goes to 110 or 115, then the spot position is closed and no profit to show. Spot Profit/loss ,800 USD ,180 USD Zero (Breakeven) ,140 USD (premium) ,140 USD (premium) 12

13 Outlook: USDJPY Possible way to play the current senario. If the premium for the long term option seems too expensive there are ways to gradually reduce it. But not without risk Sell shorter dated USDJPY calls with a smaller amount. As an example: Sell USDJPY call, strike , expiry in 1 month in 200,000. This way you earn 390 USD in premium which you can deduct from the premium on the long dated option. One month later you can do the same. BUT, be aware that your overall position will change. Might not always be wise 13

14 Case studie: XAUUSD 14

15 Outlook: XAUUSD Background Current spot price for XAUUSD is , where next? 2014 year of consolidation after big losses in Saxo Bank outlook: Still room to the downside 1200/1100 levels, but XAUUSD will eventually trade higher. 15

16 Outlook: XAUUSD Possible way to play the current senario. Buy spot? No, to large risk on downside. Sell spot? No, doesn t align with my overall view. 16

17 Outlook: XAUUSD Possible way to play the current senario. Strategy: Sell options against your view. We see good resistance for XAUUSD at 1000 because: Technical level Psycological level 1000 Overall view is that XAUUSD will trade higher We choose to sell a XAUUSD put Strike 1050 Expiry 02 mar 2015 Amount: 1000 oz Price: or 11,530 USD (spot 1380) 17

18 Outlook: XAUUSD Possible way to play the current senario. Let take a look at the profit/loss under different senarios: If the option get exercised: SPOT Profit/loss Long spot postion: Level ,530 USD Level ,530 USDLevel ? Zero (Breakeven) ,470 USD ,470 USD Note that when you sell options you have a limited profit (premium), but unlimited potential loss. So there is a lot more risk involved. 18

19 Case studie: EURUSD 19

20 Outlook: EURUSD Background Current spot price for EURUSD: , where next? EURUSD resilient and keeps edging higher Money flow into peripheral bonds. Perhaps Chinese reserve rotation. This could continue until. Positive senario: Either Fed has tapered more and the market begins to think about interest rate rises with US leading the cycle with more upside potential than Europe Negative senario: Economic recovery in US and Europe falters and sees renewal of EU turmoil In any case, Saxo Bank currently sees EURUSD trading lower eventually. 20

21 Outlook: EURUSD Possible way to play the current senario. Buy spot? upside limited Sell spot? Not our view, and too far from resistance. 21

22 Outlook: EURUSD Possible way to play the current senario. Strategy: We will try to benefit from EURUSD staying in its band by selling both a EURUSD call and a EURUSD put with expiry in 1 month. For selling both options we will receive or 8200 USD 22

23 Outlook: EURUSD Possible way to play the current senario. Let take a look at the profit/loss from this strategy in different senarios. SPOT Profit/loss ,800 USD Zero (Breakeven) ,200 USD ,200 USD ,200 USD Zero (Breakeven) ,800 USD Note that potential loss is unlimited. 23

24 FX Options vs. FX Spot Some of you might be thinking Is it worth paying the premium. FX Options seems like a slow way of investing. Well, sometimes you are right, but other times you are wrong. FX Options gives you more flexibility to create the desired strategy. 24

25 FX Options adds another dimension to trading leverage... EUR/USD Spot = You think we will go down to within 1 month but if we trade at the downtrend will be broken. You want your maximum risk to be USD 15,000, what can you do? Should you Sell spot or buy a EUR put? Sell FX Spot at , with a stop at Buy 1mth EUR Put / USD Call, Strike costs 83 pips. Buy 1mth EUR Put / USD call, Strike costs 37.5 pips. EUR 1 mio nominal EUR 1.8 mio nominal EUR 4 mio Nominal Question : Which one is the best strategy? 25

26 Buy an option as a directional play Your target level shows you the best trade to put in place! If EUR put is the best strategy (more return) If selling Spot is the best strategy Option are very valuable if you expect a large move great leverage! 26

27 Buy an option as a directional play So is it never a good idea to buy the EURUSD put in the current senario? Well, again that is not a Yes or No question. If the spot price evolves as in the example below, then our spot position will be stopped out at So we will lose money despite having the correct view. 1,39 1,38 1,37 1,36 1,35 1,34 1,33 1,32 27

28 28 Delta Hedging

29 Delta Hedging Definition of Delta The sensitivity of the option (or portfolio) to spot You don t need an option to have a delta a spot position has a delta of 100%. Common knowledge believes that the delta of an option is the probability of this option to finish in the money. This is almost true 29

30 Delta Hedging We buy 1 month EURUSD put option with strike at Amount: 1,000,000 Price 100 pips, or 10,000 USD. Spot: (So the option is at the money ). Delta for atm the money options are 50%... That means that when the spot price is decreasing by 10 pips, then the value of our option increases with 5 pips (10 pips * 0.5) (Remember its a EUR put) If the option had been a 30 delta option, then the value of the option would have increased with 3 pips (10 pips * 0.3) A popular way of talking about the delta, is that it indicates the likelyhood of an option ending up making money or not So a 50 delta option has a 50% likelyhood. And a 30 delta option has 30% likelyhood Therefore the 50 delta option is more expensive than the 30 delta. 30

31 Delta Hedging EURUSD Chart EURUSD 1m put 1,4 1,39 1,38 1, Delta Changes over time Changes with spot 1,36 1, ,34 1,33 1, ,31 31

32 Delta Hedging EURUSD Chart EURUSD 1m put 1,4 1,39 1, Investment strategies: Sell spot at ,37 1, Buy EURUSD put and let it run. 1,35 1,34 1,33 1, Buy EURUSD put and trade it actively 1,31 32

33 Delta Hedging EURUSD Chart EURUSD 1m put 1,4 1,39 1,38 1,37 1,36 1,35 1,34 1,33 1, Investment strategies: Sell spot at Sell Buy Profit 200 pips or 20,000 USD (1 mio notional) Nice profit, but bad risk reward. 1,31 33

34 Delta Hedging EURUSD Chart EURUSD 1m put 1,4 1,39 1,38 1,37 1, Investment strategies: Buy EURUSD put and let it run. Options gets exercised, so we sell spot at Buy at ,35 1,34 1,33 1, Profit 200 pips 100 pips for premium = 100 pips, or 10,000 USD Decent profit, but not as good as the first strategy. 1,31 But no need to think about a stop when spot was at

35 Delta Hedging EURUSD Chart EURUSD 1m put 1,4 1,39 1,38 Sell 50k Sell 400k Investment strategies: Buy EURUSD put and trade it activily. 1, ,36 1,35 1,34 1,33 1,32 1,31 spot Buy 500k Buy 150k Sell 100k Buy 900k Delta option Spot pos/delta hedge Overall delta spot action The option gets exercised and you sell 1 mio EURUSD at But you have also traded your option during its lifetime. On average we have Bought 1,550,000 EURUSD at Sold 1,550,000 EURUSD at 1.37 Total profit: 22,600 USD

36 Delta Hedging EURUSD Chart EURUSD 1m put 1,4 1,39 1, Investment strategies: Sell spot at PROFIT: 20,000 USD 1,37 1,36 1, Buy EURUSD put and let it run. PROFIT: 10,000 USD 1,34 1,33 1, Buy EURUSD put and trade it activily PROFIT: 22,600 USD 1,31 36

37 FX Options - Saxo Bank FX Options Reports 37

38 FX Options reports Access through Account / Forex Options Reports Example EUR/USD Spot Ladder 38

39 Why trade FX Options? Increased leverage Any market view can be implemented using options. Allows exposure to the implied volatility market. Allows for non-directional positions, that will benefit from either an active or a quiet market (for example sell a straddle if you think spot is going to remain quiet and collect the premium). Trade options against spot and spot against options (dynamic delta hedging), allowing for multiple profit opportunity throughout the life of the option. Better understanding of the option market gives valuable information about the spot market. Mature market allows tight spreads and high liquidity. 39

40 4 June 2013 Thank you!