This week marks the end of a very volatile October of forex options. The options market saw solid movements this past month as the U.S. dollar showed a sharp decline against the major currencies as well as against gold bullion.
TheLFB's Forex Option Corner will be launched as a stand-alone service offering over the coming month, and will include an on-line forex option Training Academy course, as well as an introduction to option nuances, charting packages, and a signal service.
The following interview with DFXG.com's Trade Desk Director, Mr Jerry Khargi, reveals the potential in the upcoming month of forex option trade.
Forex option buyers saw many opportunities to capitalize on this trend by employing such fundamental strategies as going outright Long Eur/Usd Calls, (an option that gives the holder the right to buy the underlying instrument at a specified price during a fixed period), or even being Long a Eur/Usd Bull Call Spread.
Bull Call Spread: An option spread designed to exploit rising asset prices by purchasing a call option with a low exercise price and selling a call option with a high exercise price. Thereby being long one call option with a strike price near-the-money, and short one call option with an out-of-the-money strike price. A hedged position, to some extent, that will still profit if the initial trade direction follows through.
At this time an option trader can strategize on the play for November Vanilla expiration, (Vanilla is a simple option whose terms and conditions do not include any provisions other than exercise style, expiry and strike, compared to exotic options which have additional terms).
As it currently stands, the option volatility skew coming from the market makers would suggest the following;
Usd/Jpy volatility is weighted more towards a decline in price, as the volatility of the Puts increases more rapidly than that of Usd/Jpy Calls, suggesting a Jpy bias.
The Eur/Jpy parity also shows the same volatility skew, as the Eur/Jpy puts carry a heavier premium, suggesting an expected decline.
Gold Bullion is skewed to the upside as the Calls are being weighted for a more volatile move, suggesting that the market participants are pricing in yet another move up for the precious metal.
Gbp/Usd has been the currency pair with the widest movements lately, consistently showing a wide intraday range. Buyers of Gbp/Usd options found it advantageous use the less risky option play, versus the pure spot currency play which was susceptible to stops being triggered before the expected move occurred.
In volatile pairs that have this amount of wheel-spinning movement it is far better to take the spot stop loss amount and invest that in time. In other words, use the stop loss amount as the premium to purchase the option.
