As part of our Forexearlywarning trading plan service we are now providing currency options trading strategies. Using puts and calls can provide the currency trader with the following advantages:

• Protecting profitable spot positions for any period of time
• Preventing losses on spot positions for any period of time
• Generating extra income on spot positions
• Generating extra income without owning a spot position
• Profiting from movement in either direction when no trend exists
• Trading with a known dollar amount at risk and known potential reward every time
• Making money in a sideways (nontrending) market

Any subscriber can join us for our weekly chat sessions where we will present the benefits of currency options and when and how to use them. If you would like to open up a demo or real account for spot and options trading account you can do so using the link below. If you are a seasoned options trader or have experience with stock options we would like to welcome you to the world of currency options trading through Forexearlywarning.

http://www.cfosfx.com/fxew.htm

We wish to thank CFOSFX for providing us with an opportunity to work with them and look forward to educating our clients about currency options.

FEW is now the “Low Cost Leader in Currency Options Training and Education”

Trading Currency Options

This document is intended to be a quick overview of options trading. Read this document and if you have previously traded stock options or are interested in currency options we will answer your questions and inquiries during our Wednesday Paltalk sessions. There are about 15 valid options strategies however FEW will only actively support and teach the strategies included in this document.

Module 1 – Basic Concepts

Call option buyer - right but not the obligation to buy the spot forex at a prespecified price for a specified period of time
Put option buyer – right but not the obligation to sell the spot forex at a prespecified price for a specified period of time

The buyer pays a premium.

Call Example

If you buy 1 call option on the EUR/USD you control 1 regular lot.
If the EUR/USD goes up the call option will increase in value.

If you buy 1 call option on the EUR/USD you must specify the expiration.
For example you can buy 1 call option good until Friday at the close of the market or any customized expiration date of your choice.

If you buy 1 call option on the EUR/USD you must specify the strike price.
Strike price is the excercise price for the option for simplicity use the current bid (at the money).

Put Example

If you buy 1 put option on the EUR/USD you control 1 regular lot.
If the EUR/USD goes down the put option will increase in value.

If you buy 1 put option on the EUR/USD you must specify the expiration.
For example you can buy 1 put option good until Friday at the close of the market or any customized expiration date of your choice.

If you buy 1 put option on the EUR/USD you must specify the strike price.
Strike price is the exercise price for the option for simplicity use the current bid (at the money).

Advantages of Using Puts and Calls

Protecting profitable spot positions for any period of time.
Preventing losses on spot positions for any period of time.
Generating extra income on spot positions.
Generating extra income without owning a spot position
Profiting from movement in either direction when no trend exists
Trading with a known dollar amount at risk and known potential reward every time.
Making money in a sideways (nontrending) market.

Module 2 - How to Blow Up Your Forex Trading Account

We have all heard it before. A trader with no knowledge seeking the pips driven by greed usually does the following.

Here comes non farm payrolls. They attempt to “straddle NFP” by putting in an entry order 20 pips above and below the market. Fine and dandy you have now lost control of your trading account due to your greed and the dealing desk cant wait.

Five minutes before the NFP announcement their body puckers and their hands sweat, NFP numbers are announced and the pair they straddle goes up 70 pips and down 150 pips and winds up somewhere about where it started. Unfortunately their broker filled them late going both ways and they wind up with two positions and have lost 50 pips on each one. On one regular lot that’s $1000 gone.

They immediately pick up the phone call the broker to bitch and moan and the broker stonewalls and does not adjust their fills. Somebody made money, the broker. Then they read you their disclaimer which was on their website anyway explaining 150 pip gaps on the GBP during NFP.

Then the greedy trader goes  to some uncontrolled message board to tell everyone to “stay away from that broker they are crooks”.

Then the next month they go and do it again because of the same ignorance and greed that they refuse to acknowledge.

Six months later their account is gone and they complain to others that trading the forex is impossible and you would have to be nuts to do so, all brokers are crooks and it is too risky.

An options traders reaction to this is that this trader is wreckless, ignorant, greedy and now has no money to move forward. Options traders call this a “dumb straddle”, nobody straddles this way in the stock market. They use put and call options to straddle. Module 3 will cover the “smart straddle technique”

So if you want to blow up your trading account this is a sure fire way to do it.

Module 3 - Options Straddles

Example Trades

Straddle – Buying equal amount of puts and calls at the current spot price (at the money).

EUR/USD trading at 1.2800

Buy 1 call option at a strike price of 1.2800 good for 7 trading days (you control 1 regular lot)
Buy 1 put option at a strike price of 1.2800 for 7 trading days (you control 1 regular lot)
Out of pocket cost is estimated at $1000 ($500 for calls, $500 for puts)
If the pair moves about 75 pips in one direction you should make some kind of reasonable profit like 30% (estimate) or get about $1300 out of the trade. It doesn’t matter which way it moves.

Criteria/Considerations for Entries

Upcoming Volatile News Events, Current Trend, lack of a  trend, or just choppy and going nowhere, Location of pair within the overall range, Current Volatility, Expected Volatility, Premiums, Desired Profit, Expiration date, Expiration date versus expected closeout date, Time in your schedule available to monitor, Trade Closeout Procedures
Price Alarms or wireless trading Alternatives for closeout, Premium Adjustments after movement Cycles, Papertrades to Develop Final Plans

Options Strangles

Strangle – Buying equal amount of puts and calls at out of the money prices.

Everything is the same as the EUR/USD example above however you would use a strike price of 1.2820 on the calls and 1.2780 on the puts, then your premiums would decrease.

Benefits of straddles - Unlimited upside.

Straddle certain news announcements that are historically volatile and put on the trade about 48 hours in advance at the money and make it expire the day of the announcement and closes out roughly 2 hours after the event regardless of the outcome. (MP)

Below is the compiled statistics I got based on last 5 years statistics:


1. Non Farm Payrolls –Unemployment Average Move: 125 Pips
2. FOMC Interest Rate Decisions Average Move: 73 Pips
3. Trade Balance  Average Move: 62 Pips


Do you know what to do now ????

Module 4 - Options Straddles (Short Straddle)

The GBP/JPY is range bound and you expect it to stay there for at least one week. You want to profit from this situation. The pair is ranging between 223.00 and 224.50 for example, (150 pip range) but the charts look difficult to trade.  Sometimes people think that in a range bound market that they cannot make money, this is not the case with options.

On a short straddle you would SELL calls and puts just below 223.00 and just above 224.50 good for 1 week. You would receive a premium in your account for each sale. At expiration if the pair stays within the range you keep both premiums. Easily hundreds of dollars on one regular lot trades. The trade can be monitored with alarms and if the pair breaks out of the range you still have two premiums in the bank and would have to take some corrective actions but remember you start off with the premiums in your account so there is a profit cushion.

This strategy has much higher risk.

Module 5 - Covered Calls

Lets say you purchase 1 lot of the GBP/USD from your entry plan at 1.9225 and it runs up 75 pips to 1.9300. You are up $750. You think the GBP has hit resistance here and could stall out for a few days. At this point you could sell a covered call against the 1 lot for 1 week and pull in around $600 into your account because you are SELLING calls.. If the GBP/USD moves up you cannot participate in the profit on that spot movement pair but you are guaranteed $1350 total return from the trade. If the spot dropped all the way back to 1.9240 or a 60 pip drop you would still break even. Not bad. You could also run a stop order just below break even on your spot position.

Remember that you can buy a spot position and immediately sell calls, this is called a buy write and your objective is to obtain a premium in your account.

Remember you can do the exact opposite with a sell position and sell a covered put.

If you sell a call against a spot position and the spot moves higher past the strike price you cannot participate in the extra profits but you can enter another spot position , if the pair goes sideways you keep the premium and the spot position. If the pair moves down you keep the premium but the value of your spot position declines.

Module 6 – Advanced Strategies

FEW will support more advanced strategies like spreads by private consultation only, we will actively teach and support the strategies in this document during our weekly paltalk session. Please bring your questions there.

Module 7 - Protective Puts

For example you would own a position of 1 regular lot in the USD/JPY and you thin it will go up but want to give the pair protection until it bounces higher. Another scenario is that you have been in the USD/JPY for a couple of weeks and have a large profit in the trade however there is a news announcement coming out which could drive the pair in either direction. In either case you could buy 1 put option to protect your position until expiration. Its like an insurance policy. If the USD/JPY drops the spot position is now protected until expiration. This is not a stop loss, if the USD/JPY drops you just cash out your puts for a profit and you still own your spot position on the USD/JPY.

Module 8 – Options Demo Accounts

After you understand the basic options concepts you should begin papertrading. Become familiar with the options order procedures and how to get quotes and use a combination spot and options platform. If you never have traded options it will be confusing at first but experienced stock options traders will love the forex.

A lot of strategies can be papertraded on the demo platform but really the best way is to also journal each papertrade and just to write things down in a logbook including the price of the spot when you enter the trade, the premiums and quotes, dollars out of pocket, and movement until you close out the trade or until expiration, and dollars out or profit/loss realized.

In lieu of a demo account you could also fund a small real money account and get continuous streaming quotes on an uninterrupted basis and not have to worry about the demo account expiring.  Then testing the long term strategies like collar spreads would be a lot easier.

To open a demo or real options trading account you can click on the link below

http://www.cfosfx.com/fxew.htm

Module 9 - Judging The Possible Outcome of Options Trades.

When judging their possible outcome of an options trade just enter the papertrade and track the underlying spot position. Did the pair go up, down, or sideways after you entered? Record the results in your journal book up to expiration.

For example if you sell a covered call and the pair moves a lot higher you cannot lose money on this trade but will not participate in any further profit on the spot position. So no risk here.

However if you sell a straddle and the pairs moves beyond the strike price of the puts or calls that you sold your account is now at risk, you must monitor this type of trade with price alarms or entry orders to manage the risk in case of the unexpected movement, so the risk scenario here is much higher than the covered call scenario in the paragraph above which has almost no risk.

Module 10 – Learning Resources

If you would like to know more about trading currency options including the various strategies, terminology etc., go to the following link and then click on “trading tools yellow tab at the top of the page” and investigate all of the information in the drop down menu.

http://www.cfosfx.com/

as well as the following link:

http://www.cfosfx.com/forex_options_broker_online_trading.htm#No%20Rollover

If you have questions about the platforms you can contact CFOSFX directly with any questions, if you have strategy questions we have a 1 hour support chat on paltalk every Wednesday night and this is free for any FEW subscriber.

Module 11 – Exercise and Assignment

All puts and calls that are in the money are exercised the day of expiration  at the specified time with a spot position, there is no premature assignment. Out of the money options expire worthless.

Module 12 - Summary and Conclusions

With currency options at our disposal we can now trade the spot forex when it is trending and occasionally trade puts or calls when the situation warrants it. As trend traders we know sometimes the market goes sideways with no trend and now we more weapons in our arsenal to profit from sideways movements in the market and strategies to protect our positions. We are looking forward to assisting our clients succeed with currency options.

*Disclaimer: Foreign exchange trading, foreign exchange investments and commodity futures trading and investments are not suitable for everyone.  Forex trading and commodity futures trading carry a high level of risk and the possibility exists that you could sustain a loss of all or more of your currency trading or commodity futures trading investment.  Before you decide to trade foreign currency options, trade foreign currency spot markets or trade commodity futures you should be aware of all risks associated with currency trading and futures trading.  If you would like more information about the risks of forex trading, commodity futures trading and of online forex trading and online futures trading, please contact a CFOS/FX futures and forex broker to discuss online foreign currency trading risks and/or commodity futures trading risks in detail. 

Forex trading involves substantial risk of loss and is not suitable for all investors. Read Full Disclosure