Trading FX Options Getting the Big Picture Right Anticipating Event Risk Identifying Catalysts Expressing the View

Transcription

1 Trading FX Options Getting the Big Picture Right Anticipating Event Risk Identifying Catalysts Expressing the View By: Bryan Rich Founder FXTraderProfessional.com Copyright 2014 Logic Fund Management, Inc. - Do Not Distribute or Use With Out Written Permission

2 NASDAQ OPTIONS DISCLOSURE The views expressed herein are not representative of Nasdaq. The trading examples do not constitute recommendations or product endorsements. For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations, or margin requirements, which are factors that may significantly affect the economic consequences of a given strategy. An investor should review transaction costs, margin requirements and tax considerations with a broker and tax advisor before entering into any options strategy. Options involve risk and are not suitable for everyone. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies may be obtained from your broker, one of the exchanges or The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, IL or call OPTIONS or visit Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and education purposes and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities. Supporting documentation will be supplied upon written request.

3 RISK DISCLOSURE Any opinions, news, research, analyses, prices, or other information contained on this website are provided as general market commentary, and do not constitute investment advice nor a solicitation. We are not liable for any loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. We have taken reasonable measures to ensure the accuracy of the information on the website. The content on this website is subject to change at any time without notice. Trading in the off-exchange Foreign Exchange market is very speculative in nature, involves considerable risk and is not appropriate for all investors. Therefore, before deciding to participate in off-exchange Foreign Exchange trading, you should carefully consider your investment objectives, level of experience and risk appetite. Investors should only use risk capital when trading forex because there is always the risk of substantial loss. Most importantly, do not invest money you cannot afford to lose. Any mention of past performance is not indicative of future results. Account access, trade executions and system response may be adversely affected by market conditions, quote delays, system performance and other factors.

4 WHAT TO EXPECT 1) Understanding the Big Picture 2) How currencies play a role 3) Expressing views through FX options 4) The trade development process

5 THE BIG PICTURE You can t understand the current environment without understanding where we ve been.

6 STEPPING BACK The crisis was/is global -- over 60 countries simultaneously in recession. 10-year global credit buildup would likely take as long to unwind (10 years). Global financial crises typically lead to sovereign debt crisis. Sovereign debt crises typically follow a progression of rising deficits, rising debt, an onslaught of downgrades and finally defaults.

7 EUROPE TOOK US TO THE BRINK Global economic crisis exposed the flaws of the European Monetary Union EMU countries share monetary policy Independent fiscal policy Stability and Growth Pact: To ensure fiscal responsibilities, set a limit on budget deficits of member states 3% Peak of the Crisis: Massive Debt, Massive Deficits Draghi: The most powerful words ever uttered by a central banker whatever it takes

8 INTERVENTION TO STABILIZE Globally coordinated monetary policy China buyer of European sovereign debt Fed: QE1, QE2, QE3 ECB: 1 trillion dollar promise Draghi: Whatever it takes BOJ: Massive response to end two decades of deflation

9 CURRENT ENVIRONMENT Shock risks have been quelled by central banks. They have have become the explicit backstop. Fed policy has given people confidence to buy stocks to buy houses again. Paper wealth = A return of confidence (to spend, hire, invest). U.S. economy improving, leading the way for the global economy. Bank of Japan has rolled out a massive stimulus program with explicit efforts to weaken the yen and to pump up Japanese stocks. European Central Bank has quelled the risk of blow up and now is undertaking explicit QE of its own.

10 THE BIG BET Central banks averted failure of the global financial system depression apocalypse. Big ugly structural problems: Overindebtedness + Lopsided trade (feedback loop) Austerity (taking the medicine) = Deflationary spiral & Depression Global Central Banks have made this bet: Stabilize, manufacture recovery, build a bridge to growth, then hope to deal with structural problems.

11 CURRENCIES: HUGE CONSEQUENCES Two regimes through the crisis Regime 1: Risk-on vs. Risk-off Regime 2: Growth and Rate Differentials Positive Growth Differential Positive Rate Differential Global capital flows

12 DEVELOPING A TRADE Investment Process Top Down Macro Level Analyzing the Plausible Outcomes Aware of Evolution of information Identifying Trades that Fit that Macro View Three Step Process What s your risk? What are the potential catalysts Intermarket Analysis Correlations Mispricings Are there divergences in markets that normally trade together?

13 FOLLOWING A DISCIPLINED APPROACH Three Step Investment Process Step #1: Fundamental Analysis Step #2: Technical Analysis Step #3: Market Position

14 FUNDAMENTALS: DOLLAR IN A BULL MARKET

15 FUNDAMENTALS: DOLLAR CYCLES *The average change in the value of the dollar index over the five completed cycles is 56%.

16 FUNDAMENTALS: MONETARY POLICY DIVERGENCE Japan and Europe are going one way the U.S. is going the other. The BOJ has promised continued QE until they achieve sustainable inflation The ECB has recently cut rates and rolled out official QE through by outright buying private bonds Draghi has vowed to expand the balance sheet by $1 trillion. The Fed has ended QE and it targeting its first post crisis rate hike early to mid next year. The result: Dollar positive, Yen and euro negative

17 FUNDAMENTALS: GROWTH DIVERGENCE

18 Macro Level FOCUS ON THE EURO The euro Shock risks subdued in Europe, focus has turned to stimulating growth Europe has been weakened by fiscal contraction Europe nearing a third recession in six years. U.S. improving, leading the global economy The ECB finally adopting QE. The weak euro is a tool for the ECB.

19 FUNDAMENTAL ANALYSIS Negative deposit rates Deflation is a real threat. ECB is printing money Valuation: Purchasing power parity

20 TECHNICAL ANALYSIS Trend break in July with fundamental significance Change in trend cycle

21 TECHNICAL ANALYSIS Long term downtrend in the euro is the crisis low is the 2005 low

22 MORE TECHNICALS Volatility breaking out from record low levels

23 EURO MARKET POSITION Market is very short euros, but has trimmed some recently.

24 EURO FORECASTS

25 EURO WHERE THE TOP STRATEGISTS THINK IT S GOING

26 TRADE THESIS Fundamentally, Europe has prospects for more aggressive easing policies. A weaker euro helps the ECB with both the weak inflation and weak growth problems. Technically, the euro has broken a huge corrective trend within a long term downtrend. Any bubble up of sovereign debt problems creates a capital outflow risk for Europe. Vulnerabilities in the current trend

27 EXPRESSING TRADES VIA FX OPTIONS Option selection Surviving noise, Sticking with trade thesis Trend vs. Countertrend Advantages of At-The-Money options Advantage of Out-of-The-Money options

28 ADVANTAGES OF FX OPTIONS Why FX Options offer an advantage Leverage Survivability Controlled Risk Volatility Benefit Directional & Non-directional

29 POTENTIAL EURO CATALYSTS The ECB buys government bonds (more aggressive QE) Further deflationary pressures Germany enters technical recession A wobbling in Russia through currency devaluation, much lower oil, further inflamed geopolitical friction A positive surprise in euro zone growth and/or inflation

30 FOLLOW ME AT FXTRADERPROFESSIONAL.COM Any opinions, news, research, analyses, prices, or other information contained on this website are provided as general market commentary, and do not constitute investment advice nor a solicitation. We are not liable for any loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. We have taken reasonable measures to ensure the accuracy of the information on the website. The content on this website is subject to change at any time without notice. Trading in the off-exchange Foreign Exchange market is very speculative in nature, involves considerable risk and is not appropriate for all investors. Therefore, before deciding to participate in off-exchange Foreign Exchange trading, you should carefully consider your investment objectives, level of experience and risk appetite. Investors should only use risk capital when trading forex because there is always the risk of substantial loss. Most importantly, do not invest money you cannot afford to lose. Any mention of past performance is not indicative of future results. Account access, trade executions and system response may be adversely affected by market conditions, quote delays, system performance and other factors. Copyright 2014 Logic Fund Management, Inc. - Do Not Distribute or Use With Out Written Permission