Strangle Options Strategy » Currency Options

6 Ways To Estimate The Value Of Forex Options

admin — Thu, 24 Dec 2009 21:03:28 +0000

Forex options trading make use of various ways to effect the valuation of currency options. The two most popular models employed in determining the option values are the Black Scholes model and the stochastic volatility model. The former was brought about by Fischer Black and Myron Scholes, thus the name of the model. The two came up with a solution for the theoretical price of options in Europe in 1970. Though this model posed some problems in application, it nevertheless was one of the most vital methods in option valuation that served as foundation for other models.The Stochastic volatility models, including the Heston model, are formed basically due to the volatility of the time and the price of the underlying spot. It may be solved in closed-form or via a more complex numerical methodology.

When the valuation model has been chosen from the two types mentioned, more models and techniques may be used to implement them. The analytic technique is the first one that can be used. It is a mathematical model that produces closed-form solutions. These solutions are quite useful because they can be calculated fast.

Another model for valuation implementation is the binomial tree pricing model. This involves the dynamics of the theoretical value of the forex options for a discrete time interval over the duration of the option. This model is more widely used by option traders.

Another model that negates the use of mathematical calculations and solutions, are the Monte Carlo models. These models determine the option’s value through a set of economic scenarios which yields an expected value for the options.

There are more models used to give value to the currency options. The finite difference models and other such similar methods may be employed depending on trader’s choice.

Forex Options – Solve a Major Problem for Novice Forex Traders

admin — Sat, 19 Dec 2009 21:59:34 +0000

A major problem that all FOREX traders face and novice traders in particular is – dealing with short term volatility, which stops them out to soon.

They get trade direction right, get stopped out and then see the currency trend the way they had thought making thousands of dollars and their not in!

FOREX options if used correctly solve this problem.

FOREX options give you unlimited profit potential with limited risk and you only risk what you pay for the premium.

You can read about the basics of options on the internet, here we want to go through some simple ways of making money buying options.

Rules!

Here are some rules that will help you make money:

Rule Number 1

Don’t buy out of the money options a long way from the strike price.

Many traders do this but the odds of the option making money are less, the profits are more if your price is hit or exceeded but “if” is the important variable.

The best way is to buy options that are at or in the money.

Rule Number 2

Make sure you buy options with plenty of time to expiry, at least a month and preferably 2 or 3

As an option comes to expiry time value will kill it.

If you follow the two rules above you will dramatically increase your chances of success.

Get the odds in your favor

Options which are a long away from the current market price and with little time value are cheap, but their cheap for a reason – The odds are firmly against you.

If you use the above simple rules you can ride out short term volatility, with pre-defined risk and stay with the big trends longer.

Most people don’t do the above, but its really common sense and if you do it, you will get peace of mind in terms of risk and be able to lock in to some nice trends.

FOREX options are a great tool for novice and professional traders, incorporate them in your trading and see what a great profit tool they are.

What Are The Difference Between Vanilla And Exotic Options?

admin — Fri, 18 Dec 2009 23:18:27 +0000

Forex options trading has come a long way since it started. Before, transaction can only be done over the counter (OTC). Today, that is no longer the norm. While OTC dealings still exist, the more common way to do forex trading including currency options trading is via the internet with the use of laptops and computers as well as through telephones/cellular phones.Currency options trading is only one of the many types of financial market trading styles done in the huge world called the Foreign Exchange market. Forex has indeed been the largest financial market worldwide and has been like that for decades. At present, billions of dollars are traded in it every single day. In forex options trading, two basic types of options are traded and given the aliases, Vanilla options and Exotic options.The informal but commonly used terminology assigned to a standard option of any financial tool, not only currency option, is Vanilla Option or just Vanilla. If the word “vanilla” is placed before “option”, then that particular option is the standard type of option that involves only the simplest meaning of options, that which involves the strike price and the expiration date. Vanilla options in forex are defined as the buying and selling of either a standard call option or a standard put option. Since there are more complex options, the term vanilla allows the trader to recognize immediately that the option at hand is just the standard one.On the other hand, the Exotic options are more complex in structure. This type is commonly transacted over the counter. If in Vanilla option, the date, price and payout structure are precise and specific, in exotic option, one or all of these features may vary. This is due to the fact that this option is tailored by the broker according to the requirements of the trader.

How To Use Currency Options In Trading

admin — Thu, 17 Dec 2009 22:08:31 +0000

Volatility is very crucial for every trader as everything seems to happen so fast on the trading market and so it is extremely crucial to quickly move the money before the trading come to an end.Sadly, there are lots of traders who were not able to distinguish the market’s direction at the right time and most often their timing don’t correspond with the trading signal. Generally, they can see the direction of the current prices, but once the trend goes up they will assume that nothing more could be done and so they eventually lose a lot of money.The currency options can transform all that as they can work well with your short term swings as well as keep you up within the trend. This is very appealing, but then, you should learn that almost up to ninety percent of the options come to an end and there’s nothing you can do about that. However, there’s a good and bad way to deal with this trade options:• The incorrect wayAs most traders prefer to purchase the cheap ones at the money options before time comes to an end or expires, they only lose their money in the end. Unknown to them, those are cheaply priced so they would go for it. In view of this, any trader should be very cautious when it comes to time decay as options expire very quickly.Many traders repeatedly commit this error because of their belief that it could bring them enormous turnover but sadly, they just lose their hard earned money.• The correct wayApparently, the correct way to purchase currency options is precisely the other way, the opposite of what was earlier mentioned. It is advised that you purchase in the money or at the money options so that the time will not be your main problem. The success rates are higher if the options have less proceeds potential than the money option.If you exactly know how to utilize currency options, in the right way and perfectly comprehend these tips, then you will not have any trouble winning on the trading market.

Currency Options – Four Simple Tips for Bigger Profits

admin — Wed, 16 Dec 2009 21:01:47 +0000

Options in theory give you unlimited profit potential and limited risk. Sounds good? In theory it does, but keep in mind that 90% of options that are bought expire worthless, so that’s a 90% chance of losing your money – if you don’t know what you are doing.

Getting the Odds on Your Side

You can however increase your odds of success with currency options by knowing which options to buy and sell and by knowing how foreign exchange markets work.

Four Simple Tips to Increase Your Odds of Success

Let’s assume you want to buy an option and the price of the British Pound is at 1.60, you are expecting the British Pound to go to 1.90. What option do you buy?

1. Potential Rewards are not what they seem

The first points to consider when buying an option is how much time value you want and what strike price you wish to buy.

There are two points to consider

. Time to expiry . How far out of of the money the strike price is

2. Get time on your side

Keep in mind your option does not just need to go your way from when you bought it; it needs to trade in the money by expiry.

3. Buy realistic strike prices

If you want to make money in options trading, buy strikes that are in the money or close to the money, with plenty of time to expiry.

4. How to buy options in longer term trends

If you are trading currencies and trading the longer-term trend, position yourself into the trend in the following manner.

· Identify the long-term trend via trend lines.

· Wait for a dip in the market to position yourself in the trend.

· Watch for dips to nearby support and then look for confirmation with stochastic crossovers, or other momentum tools to enter the option.

· Another way of buying options in the long-term trend is to look for moves to the middle of a Bollinger band to time entry. This is a great tool in strongly trending markets.

· The above will work well in strongly trending markets and if you buy in the money options or realistic strike prices with plenty of time on your side, you will increase your odds of success dramatically.

The above is a simple strategy and one that can help you make big profits from currency trading buying options.

What about Strategies that are more Complicated? You can do a whole number of options strategies, but our view is why make it complicated?

Many traders think the more complicated the strategy the better the chances of success but this is not true in currency options.

There is no correlation between how complicated a strategy is and its chances of success.

Forex Options â the 2 Golden Rules for Huge Profits

admin — Wed, 16 Dec 2009 11:01:34 +0000

Forex options are a great trading tool if used correctly. They give you unlimited profits with a set risk in advance and allow you to ride out short term volatility.

They are an excellent way to stay in the market and seek huge gains, but you

Must use them correctly and most traders donât.

Here are your golden rules for options trading:

The Odds

Most people donât look at the odds of the option they buy making money, they simply get obsessed with the potential profit.

They therefore buy options way out of the money and if it gets to the price and trades in the money they will make a killing.

The big word here is âifâ

Buying way out of the money options a long way from the strike price is like backing the outsider at a horse race.

You will win occasionally but most of the time you will lose and the odds are firmly against you.

The real proâs do the following:

1. Buy close to the strike

That means buying options that are at or close to the money or in the money.

Keep in mind if your option is not in the money at expiry you lose your entire premium.

This therefore puts the odds in your favour, you may not make as much but your chances of winning are greater and these profits will mount up over time.

The second golden rule of options trading is

2. Get time on your side

The closer and option comes to expiry the more the time premium will eat into the profit.

Therefore buying options with just a few days or few weeks to expiry is not a way to put the odds in your favour.

Get plenty of time on your side and make sure time premium doesnât kill you.

Forex options are a great trading tool if used correctly novice traders simply look at the unlimited gains and forget about the risk that options trading involves as you have to pay for the limited risk.

Donât make the same mistake use the two rules above as your basic strategy for trading options.

You will win more often and the profits will add up to some great long term gains over time and thatâs the aim of all forex traders.

Currency Options – 3 Secrets of Options Trading for Huge Gains!

admin — Sat, 12 Dec 2009 08:48:57 +0000

Many traders love the idea of currency options, they have unlimited gains and limited risk sounds great in theory, but in practice 90% expire worthless!
This article is all about how the pros use currency options to generate big consistent gains and how the losing majority don’t understand the odds of success.
This article will give you 3 powerful ways to make huge money in currency options
Don’t gamble with options!
Consider this simple scenario.
You’re betting on a horse race and you have a 3:1 favourite and you have a 15:1 outsider.
Which one is the better bet?
Well, bet on the outsider and you have bigger winning potential, but betting on the favourite gives you a better chance of winning.
How often do you see a betting shop go broke?
Not very often they know the odds of success and the betting odds reflect this. It’s obvious! Bet on the favourite.
Currency options and odds
In currency options though traders continually take the outside long shot bet.
They buy options way out of the money with short time to expiry and this means the odds of winning rely on lady luck.
If you want to put the odds in your favour you need to trade options for less potential gains but greater odds of success and this involves keeping in mind two points:
1. Buy at or close to the money
Don’t take the long shot; buy at or in the money options, in strongly trending markets.
This way you have time for the trend to take a correction and move in the right direction and keep in mind a trend in motion is more likely to continue than reverse.
If you do this, the odds are more in your favour and that what currency options’ trading is all about.
Brokers and guru’s like to tempt you with the long shots and appeal to your greed, Don’t listen, stay with at or in the money currency options and only trade trending markets this scenario is where your chances of success are highest.
2. Get time on your side
FACT: The shorter the time to expiry of currency options the greater the affect of time decay.
Many traders think these options are cheaper (they are in terms of cost) but not in their odds of success!
Make sure you give yourself plenty of time and keep it on your side.
Buying in or at the money currency options with a lot of time value costs you in terms of profit potential. However, potential that does not become cash in your bank is just that – potential.
Keep in mind the horse betting scenario earlier. Do you know someone who bets on the outsider and wins consistently? I don’t.
Keep profit potential realistic
Ok, so you have less profit potential, but you have greater odds of success.
Now let’s look at the best strategy of all.
3. How to trade with odds of 90% success
Consider this 90% of currency options bought expire worthless.
On the other hand, the person who has sold the option has profit odds of 90%.
The real way to make money is selling options. What options do you sell?
You guessed it already! Options out of the money with short time to expiry.
In reality option selling looks a bad bet – unlimited risk for a limited reward, but keep in mind the odds are hugely stacked in your favour.
Huge consistent gains
To sell currency options you need to be well capitalized and take short term swings against you. However, if you sell out the money options with time decay killing them and you spread your risk, you can pile up huge gains over time.
The above is not rocket science! Its common sense, you don’t get anything for nothing in financial markets and limited risk and the unlimited rewards of currency options comes at a cost.
Understand this and you are well on your way to making big gains in currency options.
If you are small trader be patient and take the high odds of success for lower potential gains. If you are large trader sell options and take advantage of the majority of mug traders who are keen to give you their money.
Currency options can make you money follow the above and get the odds on your side, that’s all you can do in financial trading and over time you could pile up some huge profits. Good luck!