FX Options Strategy:
This strategy Is a Fairly complex Trade style that involves using ~Spot Forex~ trades in conjunction with ~One Touch Options~. Where You are set up in a similar method to that of a Volatility Straddle using Stock options.
- One Touch Option: For those of you who don't know What a One Touch option is. It is a form of Binary options which by definition have two potential endings. If the Price you have decided (barrier) is hit then the Counter party will pay out a set amount of money (anywhere from $100 to $100,000).
- However if the price never rises or falls to reach that point then there will a total loss of the premium paid up which can range from 25-100% of the payout. In other words a $10,000 Payout if EUR/USD rises and reaches 1.34 will cost, depending on the expiration date, between $2,500 and $6,600.
- Even if you don't use my strategy, I hope you can see the potential for trading with One touch Options as you can easily Double your money with a limited downside risk.
I will run through a guide on how to trade this method as clearly as I can With Live quotes as I write.
- Imagine, you Believe AUD/USD is to rise to 1.0850 in the next month (it doesn't matter if you are long or short), You BUY AUD/USD At market 1.0515, With a TP of 1.085, You also Want to protect your trade from large downside risks so you have a SL order at 1.0299,
- So now you have an open LONG AUD/USD position. With appropriate SL and TP. Next you want to BUY a 1.03 One touch option with expiration on 18th-APR-2012. This trade will payout if the AUD/USD falls to 1.03 (your trade SL). Now the key is to calculate your expected loss if the Spot forex trade losses, and with that number in mind open a One touch trade with a payout greater than or equal to possible loss.
- So you now have a Protected trade. If AUD/USD falls to 1.0299, your trade is stopped out for a loss BUT you win from the one touch option the same amount.
- Now that you have limited downside risk, your trade has to rise to reach an equilibrium point where the profit from the Spot Forex trade outweighs the Premium paid for the FX option.
Now I will show you a real working example with trade values and potential Gain/Loss.
- In this scenario you Expect USDJPY to fall from Current levels at 82.50 to 79.50 by 18th-APR-2012.
- To start with, You've bought a 18th-APR-2012, 10,000USD payout One Touch option with a barrier at 84.00 (USDJPY). The Premium Paid for this Option is 5,394USD.
- At the Same time you open a standard Short USD/JPY trade at market price of 82.50, On this Trade you add a TP order at 79.50 and a SL order at 84.01 (one pip over barrier of option) This trade is 400,000 USD in size.
- There are 3 Potential Outcomes of this trade; USDJPY rise, stay the same or falls.
- If it rises to 84.01 then you Profit 10,000 USD from the option and lose 7,613 USD from the trade. This nets you a profit of 2,387 USD if the trade goes against you.
- If it falls to 79.50 Before 18-APR-2012 or it reaches 84.01 then you gain 14,538 USD from the trade but unfortunately you lose the premium paid for the option of 5,394 USD. However you still profit 9,144 USD.
- If the trade stays between 83.99 and 81.19 or a 280 pip range for the entire duration of the trade (1+ month) then you would be at a loss depending on the value of USDJPY.
- However after price falls below 81.19, the Profit from the trade counter acts the loss from the Option and so so profit from there and below.
To conclude, This strategy is highly profitable as this trade example would only need 25,394 USD to trade with and there is a potential to make up to 36% profit and if you are wrong and it rises you still make you nearly 10%.
However like I said before you CAN still lose however it is unlikely, as the USD/JPY would have to stay in a 280 pip range for 1 month. It has happened before but you could just as easily trade with AUD/USD and that is less likely to stay flat for that long, especially as its average daily range is over 100 pips.
This article is designed to be educational and practice with demo accounts before trading it with life money. But I have found that it is very worthwhile as I've made lots of money this way.
Thanks for reading and I welcome any Questions,