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Tradealerter Tutorials -- Hedging with FX Options - Why? - How? - When? - Where?

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  • Tradealerter Tutorials -- Hedging with FX Options - Why? - How? - When? - Where?

    Hi Traders,

    As many of you know i was an FX dealer for many years and still do contract work with an FX Options Broker.

    From time to time you may have seen me talk about FX Options in the chatroom and just at this moment we discussing short term CAD options ahead of the Employment data tonight and Bank of Canada decisions next week.

    I am going to teach via this thread when to use FXOptions and show you examples and then update you how they panned out.

    Why Hedge with FX Options?

    Bank/Hedgefund Traders/Farmers/Exporters use FX Options to hedge to the downsides while limiting the loss if the markets go the direction you want.

    Traders pay a premium to have the right to buy or sell at a selected rate for a selected time.

    The current cost to sell USD/CAD for the next 13 hours at 1.0650 is 16 pips.

    If i use this method to hedge and the CAD numbers numbers come in terrible i will only be down 16 pips whilst my open trade may be well ahead above 1.0700.

    If i used a traditional Hedge i might be down -50 pips on the hedge in a uncomfortable situation.

    Lets be clear - When i use a FX Option i still want the market to go my way but i am covered if it doesn't and i am only giving up small pips if its does.

    How?

    There are two types of normal FX Options. Calls for Buying rights and Puts for selling rights.

    For this USD/CAD example i will buy a Put that gives me the right to sell USD/CAD at 1.0650 for a selected time.

    When

    The longer the time the larger the cost.

    1 day is 16 pips

    1 week is 37 pips

    1 month is 59 pips

    There is no right or wrong time each has a benefit,

    1 day is cheap and covers you for the CAD employment data

    1 week covers the CAD employment data and the Bank of Canada decision next week.

    1 month covers CAD Data and next months US Non Fam Payrolls and general market movement.

    Where?

    Hardest part of FX options is finding a retail broker, 99% of forex brokers do not offer these. Some Professional general brokers like Saxobank and Interactive brokers give you access to ETO Options but not custom vanilla 1 day options. Also they require $5k-20k deposits so are not suitable for teaching.

    I will be using the broker Options are Easy (part of Easy-Forex) which has created FX Options for Retail clients. I have introduced many traders in the chatroom to this broker/platform already and are good entry level broker for FX Options as first deposit can be $300 and first option is risk free if you lose you will get back the premium.


    Use this link for the risk free trade promotion


    Ok lets do some live trading examples.
    "You have to learn the rules of the game, and then you have to play better than anyone else."

    Albert Einstein

  • #2
    USD/CAD 1day PUT (Selling Rights) covering CAD Employment data 14 pips

    http://i.snag.gy/Kjox0.jpg
    Last edited by Tony Darvall; 07-11-2014, 01:40 AM.
    "You have to learn the rules of the game, and then you have to play better than anyone else."

    Albert Einstein

    Comment


    • #3
      USD/CAD 1 Day Call (Buy Rights) Covering Cad Employment Data 14 pips

      http://snag.gy/vrRsM.jpg
      "You have to learn the rules of the game, and then you have to play better than anyone else."

      Albert Einstein

      Comment


      • #4
        1 week Put covers the CAD employment data and the Bank of Canada decision next week. Strike 1.0642 -- 35 pips

        http://snag.gy/CQufB.jpg
        "You have to learn the rules of the game, and then you have to play better than anyone else."

        Albert Einstein

        Comment


        • #5
          1 month covers CAD Data and next months US Non Fam Payrolls and general market movement. 56 pips

          strike 1.06427

          28 days

          596.22 CAD

          http://snag.gy/gan8V.jpg
          "You have to learn the rules of the game, and then you have to play better than anyone else."

          Albert Einstein

          Comment


          • #6
            Big fan of Option trading here and TA has definitely helped me with getting acquainted with options trading. For me, the best time to use it is during high risk volatile events like job data, ECB, NFP, etc. A couple of options I did last week:


            My plays for today are call options on USD/CAD one at the money (strike at spot) and one in the money at 1.0620. I'm anticipating bad data coming from Canada and favour options as opposed to spot trades as my risk is limited to my premium price paid at open.

            Last edited by Cartmanizm; 07-11-2014, 02:49 AM.
            GBP/USD up or down position plz

            Comment


            • #7
              Closed both my USDCAD call options for a profit. Closed one trade off shortly post news and let the other option run to ~1.07 level. Overall a very good result as I was not expecting this much movement to the upside. As of this post we saw a move of around 77 pips up.

              GBP/USD up or down position plz

              Comment


              • #8
                NEW TRADE IDEA

                3 Week CAD Call, 1.0725 Strike August 1st Expiry - Cost 51 pips - Covers Yellen, Bank of Canada and US Nonfarm Payrolls in 3 weeks.


                Game Plan we expect a move above 1.0800 from the BOC and Yellen this week, the plan is to delta hedge the profit with spot short USD/CAD trades at around 1.08500 going into NFP

                We do this for the Option Free Roll Trade. I will explain what a Free roll Option trade is later but its the most exciting thing about trading options and is impossible to do with normal FX spot trades.

                You are basically left with 2 scenarios in a Option Freeroll keep 100pips profit or make 150 pips profit.

                Copy this Trade as your FIRST options trade and if you lose -- money back no catches



                Last edited by Tony Darvall; 07-15-2014, 06:31 AM.
                "You have to learn the rules of the game, and then you have to play better than anyone else."

                Albert Einstein

                Comment


                • #9
                  Bank of Canada has disappointed and i have closed the option with a small loss. Still a strong chance of the USD/CAD moving higher i just want to protect capital here.


                  "You have to learn the rules of the game, and then you have to play better than anyone else."

                  Albert Einstein

                  Comment

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