Strangle Options Strategy » Currency

Forex Options Trading – What is a Forex Call and Put Option?

admin — Fri, 22 Jan 2010 21:59:18 +0000

What is a Forex Call Option?

A forex option gives you the right but not the obligation to buy or sell a currency pair at a certain price on a certain date. The certain price in this case is called the ’strike price’. That is the option gives you the flexibility of choosing where you want to buy or sell the currency pair. The certain date in this case is called the ‘expiry’ or the expiration date of the option.

If you think that the market is going to go up then you would buy a call option. Likewise, if you think that the market is heading down, you would buy a put option. The seller (or “writer”) of the forex call option is obligated to sell the currency pair should the buyer so decide. The buyer of the call option pays a fee (called a premium) for this right.

The buyer of a forex call option wants the price of the chosen currency pair to rise in the future; the seller either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price. Call options are most profitable for the buyer when the price of the chosen currency pair has moved up past the strike price greatly. When the price of the chosen currency pair surpasses the strike price at the time of expiration, the option is said to be “in the money”. When the price of the chosen currency stays at or around the strike price at the time of expiration, the option is said to be “at the money”. When the price of the chosen currency pair goes under the strike price at the time of expiration, the option is said to be “out of the money”.

However, to be truly profitable, the gains resulting from the upward movement must also cover the cost of buying the forex call option (premium paid). For example, if the cost (premium) of buying a call option expiry in 1 week’s time is 120 pips then the chosen currency pair must move upwards more than 120 pips past the strike price. If it rises 300 pips above the strike price by expiration your profit would be (300 pips – 120 pips) 180 pips!

What is a Forex Put Options?

A forex put option gives you the right but not the obligation buy or sell a currency pair at a certain price on a certain date. The certain price in this case is called the ’strike price’. That is the option gives you the flexibility of choosing where you want to buy or sell the currency pair. The certain date in this case is called the ‘expiry’ or the expiration date of the option.

If you feel that the market is going to go down greatly then you would buy a put option. Likewise, if you think that the market is trending up, you would then buy a call option. The buyer of the put option pays a fee (called a premium) for this right as the buyer expects the price of the chosen currency pair to drop in the future while the seller expects that it will not.

Put options can only make profits for the buyer if the price of the chosen currency pair has moved down past the strike price greatly. When the price of the chosen currency pair falls past the strike price at the time of expiration, the put option is said to be “in the money”. When the price of the chosen currency stays at or around the strike price at the time of expiration, the put option is said to be “at the money”. When the price of the chosen currency pair goes above the strike price at the time of expiration, the put option is said to be “out of the money”.

Please note that the gains resulting from the downward movement must also cover the cost of buying the forex put option (premium paid) to be profitable. For example, if the cost (premium) of buying a put option expiring in 1 week’s time is 135 pips then the chosen currency pair must move downwards more than 135 pips past the strike price. If it falls 250 pips below the strike price by expiration your profit would be (250 pips – 135 pips) 115 pips!

Forex Options Trading can do a very good model for people who want to do Forex Trading. What you need is a right system, the willingness to work and determination to not give until you reach your goal. If you are willing to take action, then this Forex Trading is suitable for you.

Forex Options Trading – How Forex Options are Calculated (part 1 of 2)

admin — Fri, 22 Jan 2010 09:11:05 +0000

Forex options are calculated with ‘Greeks’. A basic explanation of these ‘Greeks’ will help you understand how and why the forex options move and behave in a certain way. An option is a derivative and how it’s value is derived is from a formula that combines these Greeks together. The Greeks are how these options respond to various factors such as price movement, time decay, volatility, and interest rates.

There are 5 Greeks involved and we share go through them one by one.

Delta: The speed of the option’s price gain or loss against the gain or loss of the ‘mother’ or underlying asset price is known as the Delta. The Delta is a figure that shows us how fast or slow the option will move relative to its ‘mother’ or underlying asset. A Delta of 1 means the option price is moving at the same speed and direction as the ‘mother’ or underlying asset. A Delta of -1 means the option price is moving in the opposite direction for every point the ‘mother’ or underlying asset moves.

The probability of an option expiring in-the-money is also expressed in the Delta. An at the money call option has a Delta of 0.5; i.e., 50%, meaning a 50% chance of expiring in the money. A deep in the money call will have a Delta of near 1, or 100%, meaning a near 100% chance of expiration in the money. A very out-of-the-money call option will have a Delta of close to zero, meaning a near zero chance of expiring in the money.

The Role of a Cta, Commodity Trading Advisor

admin — Thu, 21 Jan 2010 21:42:06 +0000

Commodity Trading Advisor, Genuine Trading Solutions, a registered CTA with the CFTC, says the role today of a CTA is constantly evolving.

Dwayne Strocen, President of Genuine Trading Solutions says once upon a time a Commodity Trading Advisor was content to be known as a Portfolio Manager trading commodities and futures for a managed futures fund. There is no question today’s investor has become more sophisticated. In response, today’s selection of investment products has become ever more complex and varied, the need for the CTA to understand the uses and management of these products becomes even more acute.

So what exactly is the role of today’s Commodity Trading Advisor. Certainly trading of derivative products for a managed futures fund continues to be as important as before. A CTA has also become more involved with derivative analytics. This role is essentially focused upon becoming an analyst to structure and analyze the more multi-faceted requirements demanded by hedge funds, pension funds and structured products.

The use of derivative analytics to manage the adverse risk of an equity or bond portfolio brought about by adverse market conditions is critical in preserving asset growth. The uses of hedging to prevent volatility has long been understood by the largest institutions but is now available to the smaller sized company and to the individual investor. No doubt as products continue to evolve so too will the CTA evolve to meet the need of today’s professional money manager.

Derivative products are no longer limited to exchange traded commodities futures and options. There continues to be an ever expanding list of over-the-counter derivative products. These are SWAPS. SWAPS and privately transacted products transacted without the use of a recognized exchange. The difficulty is the buyer and seller must find each other to undertake such an arrangement, not always easy. The second problem is no liquidity. There is no one to sell this too should one of the parties wish to terminate the transaction prior to the agreed upon date.

A Commodity Trading Advisor’s role is no longer sufficient to be limited to trading. It is now imperative to understand the industry in a new light so to understand the changing investment environment. Analysis now becomes the catalyst to include a value added service to retain customers. This includes structured products, risk management and OTC derivatives. Continuing education has been and continues to be the hallmark of the best in the industry.

George Fontanills Incorporates Options to Lower Risk

admin — Thu, 14 Jan 2010 20:50:28 +0000

Trader George Fontanills first began utilizing options in order to go “delta neutral” on his futures positions, which would allow him to “still sleep well at night.” Since he began using options in conjunction with his futures trading, Fontanills believes he has found a way to accelerate his profits while decreasing his risk.
Fontanills began his professional life as a certified public accountant, but “decided that being a CPA wasn’t for me.” After earning a degree at Harvard Business School, Fontanills got involved in the real estate market, but then “the real estate market died.”
In 1988, with a few other partners, Fontanills decided to give the futures market a shot. “We hired a couple of guys. They happened to lose 10% of our money in 30 days and I thought ‘Hey, I could do that,” and Fontanills began to explore trading on his own.
In a systematic fashion, Fontanills studied the market. “I was probably one of the first users of Omega TradeStation and I started writing programs to try and figure out all the variables that were involved in a trade,” he explained.
“The first thing I figured out was that volatility and movement in a market meant that everyone was confused,” he said. To this day, Fontanills says he searches out markets with high volatility in order to place his trades.
Originally, Fontanills began as a day-trader, believing he could better control his risk in that fashion. However, he began to believe that he was missing a lot of the moves, which occurred overnight. At that point, Fontanills began to study options strategies. “I learned how to use options and how to become delta neutral so I could hedge myself in both directions and still sleep well at night and that’s when I really started to accelerate my profitability,” he said.
“Delta, by definition, is the rate of change of a price of an option to the rate of change to the price of the future,” Fontanills noted. “It’s how fast an option will change, relative to the speed of the futures.”
“Delta neutral means whether the market goes up or down, I’m in a position to make money,” Fontanills said. For example, “I’m short wheat and long two wheat calls, at the money. If wheat goes down, I’m making money on my short wheat position and eventually the rate of change will allow me to make more money on that position.”
While he notes that some traders tend to be scared away by the perceived complexity of options, Fontanills said “someone who can figure out how to make money with options can make money easier and safer than just using futures.”
In terms of fundamental factors, Fontanills said, “I don’t ignore fundamentals because I like to see what other people are thinking. Most of my money is made being a contrarian to what everyone else is thinking. The masses are usually wrong.”
In searching out his current trades, Fontanills said, “I look at the momentum of what is happening. If volatility and momentum goes to a certain level of what is way out of line, I’m looking for a reaction in the other direction and then I put on a trade … my greatest returns are made when something is really out of whack.”
The main future markets Fontanills trades are gold, oil, agriculturals (soybeans and wheat), S&P 500, interest rate markets and currencies. “I’m looking for fast, volatile markets and the S&P and bonds are definitely up there,” he said. Typically, Fontanills said his trades last “thirty days, at most.”
Advice he has for beginning futures traders: “Trade small–until you learn what you are doing. “Everyone overtrades at the beginning. I probably lost 20% of my account on my first trade,” Fontanills admitted. “Learn how to use all the methods that are out there to trade … learn how to use options, because every successful trader I know, knows how to use all instruments. Why reinvent the wheel? Follow the (methods) of people who have been successful,” he said. He does note, however, the importance of “whatever methodology you use, it has to fit your personality.”
Finally, of course, “learn how to limit your risk … if you can stay in the game long enough, you will learn how to become successful,” Fontanills said.

Day Trading Software Choices …Puts You In The Right Call

admin — Mon, 11 Jan 2010 21:34:51 +0000

As a former broker for a few years, in the late 90’s, I had many of my clients tell me that they couldn’t take advantage of a certain recommendation because they had lost their extra money day trading. Back than the access to sophisticated software programs was limited and also rather costly. Today we are so inundated with software systems, it’s almost impossible to know where to turn. There is a way to make your decision easier if we break it down into the areas you wish to learn more about. For instance, are you searching for educational help or a better method to track an asset concentrating on its trends? Stock trading has become one of the Internet’s largest growing activities, not only at the professional level, but as an investment-based extra activity as well. This will also determine which program or system best fills your requirements.To properly consider what software will best suit your needs, we must first determine a mutual understanding. Most investors who use the internet, know about swing trading. If you are not a day trader or long term investor, you are a swing trader. Many so-called experts lump all online traders into the bag of day trading. For the sophisticated observer it is plain to see the obvious differences. A day trader rides the rush of the asset, while a swing trader diagnosis the trends and holds onto it as long as the momentum last. If we are in agreement on these points than you will be able to comprehend the following suggestions I strongly feel is necessary for any software to be useful.1. It must be able to offer live streaming technical data. (Otherwise the program is merely educational) 2. The platform should defiantly include candlestick charting.3. Visually it has to be large enough for all the data to be seen easily. (Many of the online brokerage’s technical data is to small to be useful) 4. It must be cost effective. (Most good systems can be purchased for between one to two hundred dollars)For those of you not yet familiar with candlestick charting, I will try to give a brief but accurate explanation. The Chinese invented the market concept, and the Japanese perfected charting techniques with the use of the candlesticks. It is easy to understand this complex system, if we simply break it down to the ticks on the chart you follow everyday. We know that the lower tick is where the stock opened and the higher is where it closed. Now if we made the two lines parallel and connected them, what would we have? A candle. However, during that movement, the stock might have gone lower or higher then where it opened or closed, So our candle has formed a tail and a wick. Is it starting to make a little sense to you? Take these examples:

1. Lets assume a stock opens two cents higher than it closed yesterday. It later closes three cents higher than that. Should we get in? Not necessarily. Because as the candlestick showed us, even though it had a five cent swing from the day before, a long wick was created. This meant that it went even higher then it eventually settled on. That tells us that the pressure to go higher wasn’t strong enough. We will put it on our watch list, and keep a keen eye on it.2.A few days pass with similar results. Suddenly there is a break in the resistance. The stock has formed a candlestick with a long tail. What does this convey? We might put a buy signal for a couple of cents higher, because the long tail tells us that the bulls are ready to take over.3. Ideally you want to wait for clusters to form. Of course the greatest indicator is a long candle. One that opens and closes with hardly any wick or tail.This synopsis could have very easily taken place over a few hours rather than days, if you were day trading, for example. There are many “characters” in candlestick charting, and those who master reading them become successful.

If you can acquire software that gives you even the slightest edge in your favor, it is well worth the Investment. I don’t profess to being an expert, but I do know of some. I obviously don’t have the time to go into all the details now, but at my site Market Mentalist you will find all you need to know about investing online. There is access to some of the top trading systems available including software, books, newsletters, and Forums. Whether you are an inquisitive novice or a seasoned pro Market Mentalist offers the online investment resource you just might be seeking.

Stock Market Trading Software…Up Or Down You Make Money

admin — Sun, 10 Jan 2010 21:31:48 +0000

These Fundamentals Aren’t TechnicalI believe in order to lay a solid foundation for successful trading, there are three basic fundamentals you must adhere to. The first is knowledge. There are only three things really that separate us from an expert. Training and experience comes after knowledge. Knowledge comes first, and expertise is accomplished through experience and constant training. So, how knowledgeable are you? Let us assume that you have some knowledge or you wouldn’t be researching the market. Do you know the difference between day trading and swing trading? To me there is a major difference. Many so-called experts lump all online traders into the bag of day trading. For the sophisticated observer it is plain to see the obvious differences. A day trader rides the rush of the asset, while a swing trader diagnosis the trends and holds onto it as long as the momentum last. Knowing these subtle nuances will determine what kind of software you need.Training encompasses a lot of different meanings. For our purposes I want to address technical analysis. I strongly feel any trader not taking advantage of the immense knowledge gained from technical charts is wasting time and money. Of course the fundamentals are important. They are much more important to the investor than the trader, however. A company’s financials don’t matter a great deal if you are planning on dumping the asset in a few minutes, a day, or a week. If there was any news about the company’s financials, believe me you would see it reflected on the technical charts.Use Software for Your AdvantageA Solid Platform to Build Your WealthNow based upon the idea that my assumptions are accurate, and you are still with me, as far as software platforms, the following suggestions I strongly feel are necessary for any software to be useful.1. It must be able to offer live streaming technical data. (Otherwise the program is merely educational) 2. The platform should defiantly include candlestick charting.3. Visually it has to be large enough for all the data to be seen easily. (Many of the online brokerage’s technical data is to small to be useful) 4. It must be cost effective. (Most good systems can be purchased for between one to two hundred dollars)More on Candlestick ChartingA Candle Burns Bright in Your FutureFor those of you not yet familiar with candlestick charting, I will try to give a brief but accurate explanation. The Chinese invented the market concept, and the Japanese perfected charting techniques with the use of the candlesticks. It is easy to understand this complex system, if we simply break it down to the ticks on the chart you follow every day. We know that the lower tick is where the stock opened and the higher is where it closed. Now if we made the two lines parallel and connected them, what would we have? A candle. However, during that movement, the stock might have gone lower or higher then where it opened or closed, so our candle has formed a tail and a wick. Is it starting to make a little sense to you? Can you see the advantage of knowing this information, for getting in and out, and setting a stop loss?Take these examples: 1. Lets assume a stock opens twenty cents higher than it closed yesterday. It later closes ten cents higher than that. Should we get in? Not necessarily. Because as the candlestick showed us, even though it had a thirty-cent swing from the day before, a long wick was created. This meant that it went even higher then it eventually settled on. That tells us that the pressure to go higher wasn’t strong enough. We will put it on our watch list, and keep a keen eye on it.2.A few days passes with similar results. Suddenly there is a break in the resistance. The stock has formed a candlestick with a long tail. What does this convey? We might put a buy signal for a couple of cents higher than it has previously gone, because the long tail tells us that the bulls are ready to take over.3. Ideally you want to wait for clusters to form. Of course the greatest indicator is a long candle. One that opens and closes with hardly any wick or tail.This synopsis could have very easily taken place over a few hours rather than days, if you were day trading, for example. There are many “characters” in candlestick charting, and those who master reading them become successful.If you can acquire software that gives you even the slightest edge in your favor, it is well worth the Investment. I don’t profess to being an expert, but I do know of some. I obviously don’t have the time to go into all the details now, but at my site Market Mentalist you will find all you need to know about investing online. There is access to some of the top trading systems available including software, books, newsletters, and Forums. Whether you are an inquisitive novice or a seasoned pro Market Mentalist offers the online investment resource you just might be seeking.

Forex Trading – Easy as 123 – Forex Learning for Beginners

admin — Tue, 22 Dec 2009 12:24:01 +0000

Making foreign exchange trading an easy thing to learn is a challenge to most educators. There are a lot of technicalities involved in a forex trade, not to mention the gut-feel a forex trader should have in making a successful forex trade. The School of Pipsology has made things as easy as can be by segmenting the learning into levels that are more manageable to the beginner. Just like when you were learning how to count, you can learn forex trading in a snap. You go from Pre-school level learning the basics, and move on to other concepts in the grade school, high school, and college levels. More advanced studies are likewise available to those who want to take their forex trading education to higher levels.

First things first. If you want to succeed in forex trading, you should not bypass the basics. Take the time to learn the basics of forex options trading and currency trading just like when you were learning your 123s.

The first step to learning how to trade forex is to know about the types of trading and the types of charts used in analyzing forex figures. This is covered in the Kindergarten level. The 1st Grade level covers candlestick patterns used in analyzing how the market is trading.

Next, 2nd Grade, comes learning about support and resistance levels for market tolerance as indicated by trend lines.

The 3rd level covers how the Fibonacci retracement and extension levels can be applied to your charts and help you place your buying or selling orders. Pricing movements and charting are covered in the 4th Grade level.

And finally, on your last level in the elementary stage, you learn about the common chart indicators like the Bollinger Bands, the MACD, and the Relative Strength Index among others.

Once you have gotten these learnings down pat, you can move on to the high school stage and learn about more complex forex concepts. The succeeding forex education curriculum is available at the School of Pipsology. These levels will be easy enough for you to understand once you have a strong basic foundation.

The Joy of Options

admin — Sun, 20 Dec 2009 21:22:59 +0000

Owning stock has only two, maybe three, possibilities. The stock goes up. Or the stock goes down. Or, as a third possibility, it does a little of both. If you buy a stock, all you want it to do is go up.
If you sell a stock short or close a position (or consider buying it and then decide not to , all you want it to do is go down. I call this one-dimensional trading. You’re long, you’re short, or you’re flat. Your gains and losses travel up and down the number line you may remember from elementary school in lock step with the movement of the stock. Not only that, but it takes a big move to make a big profit. And a big move against you can mean a big loss. Potentially all the way down to zero.
You need to add a second dimension to your trading. You need more choices than picking a direction and hoping you are right. You need to limit your losses, improve your returns, and increase your flexibility. You need options.
For many people, options are something to avoid, being dangerous, complex, and scary. I would like to introduce you to the joy of options. Any time you think you want to buy a stock, I’d like to get you in the habit of first looking at how you could do more with less using options.
In the stock and commodities markets, the type of option we just described would be known as a call. A call typically represents 100 shares of a stock. In the commodities markets, a single option contract represents a single futures contract. (For simplicity, from this point forward, I will talk about options on stock. Just remember that the same discussion applies to options on futures.)
Owning a call gives the owner the right to buy 100 shares (usually) of the underlying stock at the agreed upon strike price at or before the expiration date. (I say “usually” 100 shares because, due to splits or acquisitions, there are times when an options contract may represent something other than 100 shares.) Selling a call gives the seller the obligation to sell, if asked, 100 shares of the underlying stock at the agreed upon strike price any time up until the expiration date.
The other kind of option is called a put, and it is exactly the same as a call with one simple difference. A put gives the owner the right to sell 100 shares (again, usually) of the underlying stock at the agreed upon strike price at or before the expiration date. You can think of a put as insurance. No matter how badly the stock price crashes, having a put means that you can sell your stock for the strike price. On the flip side, selling that put means you may be obliged to buy stock at far more than its current market price.
An important distinction to always keep in mind: Buying an option gives you rights. Selling an option gives you obligations. Buying an option cannot cost you more than what you pay for the option. Selling an option can cost you far more than what you receive for selling the option.
Let’s examine the terminology of calls and puts. The underlying is the actual instrument such as a stock or commodity that is being represented by the options contract. In the real estate example, the house would be the underlying. Options are said to be derivatives because their value is directly tied to or derived from that of the underlying. An option has no meaning without an actual asset underlying it. It is the right to buy or sell that underlying asset that gives the option a reason for being and some value.
The strike price is the agreed upon price for which the underlying can be bought or sold under the terms of the option contract. In the real estate example, the strike price was $100,000. The expiration date, obviously, is the date when the option expires. The day after expiration, an option is worthless. This is the single most important fact about options that you must remember. This is why your friends think you are crazy for your interest in options. Unlike a stock, which you can hold forever, an option has a clearly defined shelf life.
One term remains, and that is the premium. The premium is what you pay for the option, when you are the buyer. Or what you receive for an option, when you are the seller. In our real estate example, the premium was $500. That’s what it cost you to hold the right to buy the house any time in that thirty-day period. The last day of the thirty-day period would, again, be the expiration date.
We have barely scratched the surface. I say that not to intimidate you, but to make you realize that you only have enough knowledge to be dangerous to yourself. Please do not think that you are ready to go out and buy calls or place spread trades. You are not. You don’t know how an option moves relative to moves in the price of the underlying. You don’t know what time does to the value of an option. You don’t know what volatility is or how it plays into option prices. You don’t know the types of spreads or what they are used for.
Please, please get yourself better educated before you start putting money into option trades. Resist the temptation to buy some cheap options, just to try it out. This is expensive education. There are plenty of advantages to trading options, but it’s still a ruthless market, happy to take your money, your wallet, and your hand if you give it an opportunity. Learn the rules of the game before you put money on the line.
Trading options can be satisfying, rewarding, stimulating, and fun. I invite you to add another dimension to your trading by including options to your repertoire.

Forex Trading – Back to School Forex Education

admin — Tue, 15 Dec 2009 22:33:55 +0000

Foreign exchange trading could be a complex business to get into. The only way for any beginner to learn the ropes of forex trading is to go through intensive education and training. Quite heavy, so it seems. But, broken down in digestible chunks, you will soon be able to find your way around a successful forex trading business. There is a way to teach you the intricacies of forex trading in a simple and understandable way. Replicating the way you learned your ABCs and 123s, you will soon speak forex as if it is your second tongue. Soon, you will join the new breed of successful traders in the foreign exchange market.

Simply put, succeeding in forex trading rests on three things: making pips, keeping pips, and repeating the cycle. If you can master these three things, you are on your way to successful forex currency trading and forex options trading. To make things easy for you, you can break down your forex trading much like your early education was broken down. You move from one level to another once you have successfully completed the learning requirements of each level.

At the School of Pipsology, you learn the basics of forex from Pre-school, to elementary, to high school, to college, and then on to further more advanced studies. Graduating from each level will take you through learning milestones until you are finally able to identify trading opportunities, time the market, and close a trade. There are lots of important forex concepts to learn at the School of Pipsology if you want to be a successful forex trader. By the fifth grade level, you will already have learned how to do basic market analysis and read common chart indicators as Bollinger Bands, MACDs, Parabolic SARs, Stochastics, and RSIs. The best thing about it is that you can learn in simple terms and therefore at a faster pace.

Forex Options Trading – Advantage of Technical Analysis

admin — Mon, 14 Dec 2009 23:14:19 +0000

In the world of foreign currency exchange, it is important for any trader to be able to analyze the market and look for the signals in order to determine his or her next move. Every decision made should be based upon the information one can gather in the movement of the market. But, how do you actually analyze the complexity of this market?

In analyzing the world’s largest financial market, there are two options for any trader. One is to use fundamental analysis which is concerned with the different factors that can affect the price or the value of any currency. Such factors include the performance of the government, the economic situation and the political issues. All of these are important factors in determining fundamental analysis.

The other way to analyze the foreign exchange market is to use technical analysis. This procedure is actually used more often compared to fundamental analysis. This is a more efficient way to analyze the market and insure that you will earn money. Basically, technical analysis uses charts as well as statistical data in order to see what can happen next. This procedure is aided by the belief which says that what happens in the past could happen again. With that in mind, the trader would then be able to use the charts to predict what movement it will make in the near future.

Knowledge is indeed power and the foreign exchange market is a prime example for that. The forex technical analysis is the best choice for any aspiring trader.