Currency options are definitely a useful tool for either hedging or taking outright positions. Or you can catch the bias by calculating the fair price of the option and then compare what they quote...
Forex Options allow you to customize your options including payout amounts, barrier prices and expiration dates. These customizable features put you in full control of your risk. Depending on the option that you select, as long as the criteria behind your barrier prices are met, you will receive your payoff amount. If not, all you can lose is your predetermined option premium.
Forex Options are also known as Digitals (as well as a myriad of other names which new entrant companies have given them) Digital options are options that pay a fixed amount (or nothing) on expiry - unlike the traditional calls and puts that pay varying amounts at expiry.
The companies that offer these are clearly acting as BOOKIES and hedging the bets with option writers and other traders. In this section we list all the 'flashy terms' by which these forex options are referred - it appears that each time a new company enters the market it invents new stylish/coolish (like one touch, two touch, digital, bull bet, bear bet, expiry range, double touch, bull/bear stop, up or down...etc)
Here is a strategy I have experimenting these last few weeks which appears to be working
So if the euro rises to 1.3200, we make 250 pipsx2 on the trade plus 300 pips for the DT option. The cost has been 253 pips for the two options. Net result +550 pips.
If the euro falls to 1.2800, we lose 150 pipsx2 on the trade and make 300 pips on the OT option. The cost of the OT option has been 137 pips. Net result -137 pips.
If the euro falls further to 1.2700, we make 300 pips on the DT option. The cost of the DT option is 116 pips. Net result +184 pips.
| Terms used by different companies to refer to binary products include (this list is not exhaustive!): | ||||
| Digital Options | Binary Bets | |||
| Exotic Options | Fixed Odds Trading | |||
| Currency Options | Currency Betting | |||
| Hedgelets | Fixed Odds Financials | |||
| Click Options | Fixed-Odds Financial Products | |||
| Box Options | Fixed Odds Financial Betting | |||
| Cash-or-Nothing Options | Digital Bets | |||
| Binary Options | Binary Betting | |||
| Fixed Odds Trading | ||||
| Financial Betting | ||||
| Asset-or-Nothing Options | ||||
| All-or-Nothing Options | ||||
| Exotic Options | ||||
| Forex Options | ||||
| Mini Options/Derivatives | ||||
| Equity Options/Derivatives | ||||
| Barrier Options/Derivatives | ||||
| OTC Options | ||||
| Vanilla Fx Options | ||||
| DO THESE STATEMENTS DESCRIBE YOU? | ||||
| Good Market Calls, Bad Market Timing | Use Digital Option | Example | ||
| You Trade 15 Minute Movements, But Also Have A 2-Month View | Use Digital Option | Example | ||
| You Are Great At Trading Breakouts, But You Can't Make Money In Range Markets | Use Double No-Touch Option | Example | ||
| You Are Great At Picking Tops and Bottoms In A Range Market, But As Soon As There Is A Breakout, You Lose Money | Use Double One-Touch Option | Example | ||
| Range Trading Works Great For You, But Market Volatility Or Excessive Movements Are Your Pitfalls | Use Double One-Touch Option | Example | ||
| You Are Great At Determining Market Movements, But Human Emotions Drive You to Let losses Run or To Take Profits Too Early | You have multiple options | Example | ||
Good Market Calls, Bad Market Timing
You Trade 15 Minute Movements, But Also Have A 2-Month View
EUR/USD now: 1.0300
I think: EUR/USD will be above 1.0700 in 2 months
Sample Option: Buy 2 Month EUR call / USD put Digital Option with $5000 payoff for $800
2 Months From Now:
EUR/USD > 1.0700 = Earn $5,000 (minus the premium paid)
EUR/USD < 1.0700 = Option Expires Worthless, lose $800
Digital options are quite simple and relatively inexpensive. If you believe that the EUR/USD will be above 1.0700 at the end of two months, but you are not exactly sure when this decline will occur, a digital option is perfect for you. You would simply buy a 2-month EUR call /USD put digital option with a 1.0700 strike. If after 2 months, the EUR/USD rate is equal or greater to 1.0700 at expiry, you would automatically earn your predetermined payoff. If not, your option would simply expire worthless. With low option premiums, your predetermined return can be in excess of 100%.
You Are Great At Trading Breakouts, But You Can't Make Money In Range Markets (To Hedge Against Range Markets)
AUD/USD now: 0.5600
I think: AUD/USD will break of 0.5400 or 0.5800 in the next month and I will make $20,000 in a breakout scenario
Sample Option to Hedge Against No Profits In Range Market: Buy 1 Month AUD/USD Double No-Touch Option with 0.5400 and 0.5800 barrier levels and a $20,000 payoff for $7,000
1 Month From Now:
AUD/USD does not breakout and does not touch 0.5400 OR 0.5800 = Earn $20,000 (minus the premium paid).
AUD/USD breaks out and touches either 0.5400 OR 0.5800 = Option Expires Worthless, lose premium of $7,000, but make expected breakout profits of $20,000
If you have a successful track record of identifying and profiting from breakouts, but always lose money or do not make money in range markets, a double no-touch option is perfect for you. For example, if you are waiting for breakout levels in AUD/USD at 0.5400 or 0.5800 and expect this to happen within the next month, you can profit from the range trading market by buying a low cost double no-touch AUD/USD option with 0.5400 and 0.5800 barrier levels and a payoff of $20,000 for $7,000. This way, if the AUD/USD does not breakout within the next month, you will still earn $20,000. If it does breakout, you will lose the $7,000 premium paid for the option, but you will earn from your breakout strategy.
You Are Great At Picking Tops and Bottoms In A Range Market, But As Soon As There Is A Breakout, You Lose Money(To Hedge Against Breakout Markets)
Range Trading Works Great For You, But Market Volatility Or Excessive Movements Are Your Pitfalls (To Hedge Against Breakout Markets)
NZD/USD now: 0.5250.
I think: NZD/USD will range trade 0.5100 or 0.5400 in the next 3 months, and I will make $8,000.
Sample Option to Hedge Against Losses if NZD/USD breaks out of range: Buy 3 Month NZD/USD Double One-Touch Option with 0.5100 and 0.5400 barrier levels and a $15,000 payoff for $1,800.
3 Months From Now
NZD/USD breaks out and touches either 0.5100 OR 0.5400 = Earn $15,000 (minus the premium paid) NZD/USD continues to range trade and does not touch either 0.5100 OR 0.5400 = Option Expires Worthless, lose $1,800, but make expected breakout profits of $8,000
If you are successful in picking tops and bottoms in a range market, but can't sustain your losses in a breakout market, then a double one-touch option is perfect for you. For example, if you are range-trading NZD/USD between 0.5100 and 0.5400 with good success, but know that if it breaks 0.5100 or 0.5400 within the next 3 months, your losses could large. However, you can profit or reduce losses from a breakout by buying a double one-touch NZD/USD option with 0.5100 and 0.5400 barrier levels and a payoff of $15,000 for $1,800. This way, if NZD/USD breaks out of those levels within the next 3 months, you will receive a payoff and reduce losses by $13,200. If it does not breakout, you will lose the $1,800 premium paid for the option, but you will earn from your range trading strategy.
You Are Great At Determining Market Movements, But Human Emotions Drive You to Let losses Run or To Take Profits Too Early.
I think the currency pair will continue to range trade - Use Double No-Touch Option
AUD/USD now: 0.5600
I think: AUD/USD will trade in range of 0.5400 or 0.5800 in the next month
Sample Double No-Touch Option: Buy 1 Month AUD/USD Double No-Touch Option with 0.5400 and 0.5800 barrier levels and a $20,000 payoff for $7000
1 Month From Now:
AUD/USD does not breakout and does not touch 0.5400 OR 0.5800 = Earn $20,000 (minus the premium paid).
AUD/USD breaks out and touches either 0.5400 OR 0.5800 = Option Expires Worthless, lose $7,000
If you think the currency will continue to range trade, use a double no-touch option. You can specify your higher AND lower barriers and as long as the currency does not touch BOTH of those barriers from the trade date to the expiration date, you will receive your predetermined payoff.
I think the currency pair will continue to trend - Use No-Touch Option
USD/JPY now:120.00
I think: USD/JPY will continue its downtrend and not touch 123.00 again within the next 3 months
Sample No-Touch Option: Buy 3 Month USD/JPY No-Touch Option with 123.00 barrier and a $5,000 payoff for $1,000
3 Months From Now:
USD/JPY does not touch 123.00 = Earn $5,000 (minus the premium paid)
USD/JPY rallies and touches 123.00 = Option Expires Worthless, lose $1,000
If you think the currency will continue to trend, use a no-touch option. You can specify a upper OR lower price and as long as the currency does not touch the price before expiration, you will receive your predetermined payoff.
I think the currency pair will have large movements - Use Double One-Touch Option
GBP/USD now: 1.6000
I think: GBP/USD will have a large move and break either 1.5800 OR 1.6200 in the next 6 months.
Sample Double One-Touch Option: Buy 6 Month GBP/USD Double One-Touch Option with 1.5800 and 1.6200 barrier levels and a $10,000 payoff for $2,000
6 Months From Now:
GBP/USD breaks out and touches either 1.5800 OR 1.6200 = Earn $10,000 (minus the premium paid)
GBP/USD continues to range trade and does not touch either 1.5800 OR 1.6200 = Option Expires Worthless, lose $2,000
If you think the currency will have a breakout soon, but do not know in which direction, use a double one-touch option. You can specify an upper AND lower price and as long as the currency does not touch ONE of these barriers before expiration, you will receive your predetermined payoff.
I think the currency pair will retrace - Use One-Touch Option
USD/CAD now: 1.5600
I think: USD/CAD will retrace its recent strong move and touch 1.5400 again in the next month
Sample One-Touch Option: Buy 1 Month USD/CAD One-Touch Option with 1.5600 strike and a $3,000 payoff for $500
1 Month From Now:
USD/CAD retraces and touches 1.5600 = Earn $3,000 (minus the premium paid)
USD/CAD continues to rally and does not touches 1.5600 = Option Expires Worthless, lose $500.
If you think the currency will retrace its move, use a one-touch option. You can specify a upper OR lower price and as long as the currency touches the price once before expiration, you will receive your predetermined payoff.
I think the currency pair will rally or have a correction - Use Digital Option.
EUR/USD now: 1.0300.
I think: EUR/USD above 1.0700 at the end of 2 months.
Sample Option: Buy 2 Month EUR call / USD put Digital Option with $5000 payoff for $800.
2 Months From Now:
EUR/USD > 1.0700 = Earn $5,000 (minus the premium paid)
EUR/USD < 1.0700 = Option Expires Worthless, lose $800
If you think the currency will have a rally and will be above a specific price at expiration, use a digital option. You can specify the rate that you believe the currency will be above at expiration and as long as it rallies and remains above that level at expiry, you will receive your predetermined payoff.
OR
EUR/USD now: 1.0300
I think: EUR/USD correct to 0.9900 in 2 months
Sample Option:Buy 2 Month EUR put / USD call Digital Option with $5000 payoff for $800
2 Months From Now:
EUR/USD < 0.9900 = Earn $5,000 (minus the premium paid)
EUR/USD > 0.9900 = Option Expires Worthless, lose $800
If you think the currency will correct and will be below a specific price at expiration, use a digital option. You can specify the rate that you believe the currency will be below at expiration and as long as it corrects and remains below that level at expiry, you will receive your predetermined payoff.
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