An insight into forex exotic options - RefcoSPOT.com and Forex-Options.com

10/19/2006 - Please note that RefcoSpot.com which used the same underlying platform as Forex-Options.com has now closed (following the fall of brokerage giant Refco). Forex-Options.com is still in business and accepts US and international clients. However, note that if you reside in the UK you will have to first open an account at FXCM.com (not FXCM.co.uk; this means that if you have already created an account at the London office you will need to create a new account at FXCM.com) to be able to trade them.

06/06/2007 - FXCM have announced that effective June 3, 2007, they will be suspending Fixed Rate Options Trading™ from the FXCM platform indefinitely. This means that Forex-Options.com has now also closed. This article will however remain published on the site as general interest.

A recent addition to the forex market within the last few months has been forex options (to retail traders anyway). Today, I'm going to review RefcoSpot.com and Forex-Options.com offered by the Refco Group and FXCM group of companies respectively.

Currency trading has never been easier. When trading with the SPOT system, you make a prediction such as, "The Euro during the next week will rise 100 ticks above the current market price." If the prediction comes true, you will profit by an amount that you set at the beginning of the trade. The amount can be as small as $100 or big as $10,000 per trade. However, the amount you risk (the cost of the option) can be a small fraction of the potential gain. The less likely the prediction will come true in the eyes of the market, the lower the cost of the option relative to the potential payout. Forex options have traditionally been tools of institutional investors who have millions to spend but new technologies are making it possible to scale this for much smaller size accounts.

Refco and FXCM are strategic partners - this explains why http://www.refcospot.com and http://www.forex-options.com appear to be clones of each other except of course for some superficial differences (the products on FXCM are referred to as fixed rate options trading while those on the RefcoFX site have been aptly baptized single payment options trading) In fact, they even seem to share the same address:

After closer examination it turns out that the Refco Group owns 40% of FXCM so no wonder they share the same technology!

The risk and potential reward for the RefcoSpot option is always pre-defined. The cost of the option (the premium), which is paid when the trade is initiated, represents the entire risk of the transaction. In the worst case, the option trader will not have their premium returned to them. The reward for the option is also pre-defined when the option is initiated. The option trader can define a payout between $100 and $10,000 to be paid on expiration if the option is successful.

The shortest options offered have a life-time of 12 hours and you can buy options with a life span of up to 1 month. The minimum amount to open an account is USD300 for a mini account and they accept credit card deposits (as well as online cheques and wire payments). The fee for withdrawing funds amounts to $25 for domestic US wires and $40 for international transfers.

International clients are welcome at RefcoSpot.com (operated by the Refco Group) and Forex-Options.com (operated by FXCM) and note that you are not restricted to deal with a US company; you can create a FXCM.co.uk account (regulated by the UK FSA) and use the log on details to access the Forex-Options.com In any case if you open an account with their global fxcm.com site they are still regulated by the CFTC and NFA - they are definitely a stable company.. Interest is only charged or accrued on open positions due to rollover but not on unused balances... and you can trade in the main currencies (GBP, EUR, and USD).

However the forex derivatives which RefcoSpot.com (also Forex-Options.com) call "traditional" spot forex are nothing more than the financial fixed odds bets offered on Betonmarkets.com - except that Betonmarkets call it what it really is - betting on the stock market and give more more "options" for trading.

To us, Refco's options platform seems more like a gambling/betting platform than an options one. Although they might derive their cost using an options calculator, the ability to not be able to exit out of positions seems to give the feel that we have more of a gambling facility than a trading facility. Take it whichever way you will - try the free trial account to see how it works and test your own hand at what they refer to 'forex option trading' and to which I call 'forex fixed odds betting'...

Comparing RefcoSpot.com and ForexOptions.com forex options to the ones available on Betonmarkets.com

Betonmarkets is an online financial betting site which offers forex products remarkably similar to the ones found on RefcoSpot (although its a completely separate company)

For comparison purposes I'm comparing the one touch/no touch option contracts available on both Betonmarkets and RefcoSpot (whenever I'm referring to RefcoSpot its equally valid to ForexOptions.com as the products are identical)

One Touch Option Contract

I will receive a payout if the market trades at or through a specified barrier.

I wish to receive 'USD1000' if 'EUR/USD' trades at or through '1.29' For the session expiring at: 5/30/05 10 pm -> cost is USD 843.31

Same bet on Betonmarkets costs USD 813.1

No Touch Option Contract

I wish to receive 'USD1000' if 'EUR/USD' NEVER trades at or through '1.29' For the session expiring at: 5/30/05 10 pm -> cost is USD 289.98.

Same bet on Betonmarkets costs USD 321.6

So a one-touch on Betonmarkets costs USD813.1 while a no-touch costs USD321.6. And a one-touch on Refcospot costs USD 843.31 while a no-touch costs USD 289.98

Now adding up USD813.1 (one touch) + USD321.6 (no touch) ~ USD 1134.7 (Betonmarkets).

And adding up USD 843.31 (one touch) + USD 289.98 (no touch) ~ USD1133 (RefcoSpot)

Now since the payout was USD1000; this USD1133 represents a USD133.

Also, you will probably find the following correspondence e-mail extracts I've had with RefcoSpot support staff interesting - not sure if they are canned e-mails but it definitely makes you feel you're dealing with true professionals - definitely not the average Joe even when you're chatting to them on their live person application.

Dear Andy,

Thank you for your email. As a member of the Refco Group of companies, RefcoFX offers its customers the reliability and financial strength of Refco Group, which is a powerful competitive advantage. With over $20 billion in assets, customer equity of approximately $4 billion, over 180,000 customer accounts and over 400 million in individual customer transactions handled during the most recent fiscal year, the Refco Group firms offer a unique combination of service, reliability and strength. You an be assured that your funds are safe. When you trade with Refco Spot account, each trade is backed by Refco's 22 Billion line of credit. We have clients in many domestic and international locations, therefore it would be easy for you to open an account from Wisconsin.

The minimum to open a spot account is $300. I have attached an application for your convenience. Simply check off "S.P.O.T" on the agreement. Please fax that to 212-858-5737 and it will be processed by our admin dept within 2 business days.

Regarding reporting taxes: due to the global nature of the foreign exchange market, RefcoFX is not required to 1099 any profits or losses to the IRS or to its clients. However, under Section 61 of the Internal Revenue Code, it is the clients' obligation to report all profits to the IRS under the following guidelines:

Trading in the foreign exchange market is taxed using the 60/40 rule, which treats profits or losses as 60% long-term capital gains/losses and 40% short-term capital gains/losses. The 60/40 rule applies regardless of how long you actually hold a position.

Everyone who trades in spot foreign exchange market is assumed to be trading under Investor Status -- unless they qualify for AND decide to file for Trader or 475-Trader status. Essentially, the level of involvement in the market determines a trader's status. Traders who trade more and are more dependent upon trading for financial sustenance are likely to encounter more favorable tax regulations.

Below is a summary of how the tax laws work in the United States for FX trading:

STATUS SUMMARY

Investor

Trader

475 Trader Status

If you have any further questions please do not hesitate to contact us 24 hours a day, 7 days a week.

Dear Mr Richardson,

Thank you for an interest in RefcoFX. The SPOT platform allows clients to place exotic option trades. Exotic options are similar to plain vanilla options in that they are both derivative securities deriving their value from an underlying asset. The power of options lies in their versatility. They enable you to adapt or adjust your position according to any situation that arises. Options can be as speculative or as conservative as you want. This means you can do everything from protecting a position from a decline to outright betting on the movement of a currency pair.

RefcoFX is a division of Refco, LLC, a member of the Refco Group, is the world's largest non-bank futures commission merchant and is an acknowledged leader in execution and clearing services for global, exchange-traded derivatives. Refco Group is registered as a Futures Commission Merchant (FCM), regulated by the Commodity Futures Trading Commission (CFTC), and is a member of the National Futures Association (NFA). As a registered FCM, Refco is required to meet strict financial standards, including capital adequacy requirements, and on a monthly basis required to submit financial reports to regulators. Information can be found online at: http://www.nfa.futures.org/basicnet/ Refco Group NFA ID: 0198028

Safety of funds is a paramount issue, yet be assured that as a regulated FCM, Refco Group is under the strict supervision of government regulators and your funds are completely secure. As an FCM, government regulators require that client funds be held in segregated accounts. Refco maintains customer funds at banking institutions for the sole purpose of the clients' trading activity, and may never utilize such funds for operating expenses or other investment purposes. Funds are withdrawn from these FDIC insured bank accounts ONLY as a direct result of clients' trading related activities or client's request for withdrawal. Client funds are completely segregated from operating accounts, and therefore may not be used for day-to-day operations, credit lines outside of trades placed by clients, and other investment purposes.

Government regulators also guarantee clients' funds by requiring FCMs to meet strict financial standards including capital adequacy requirements. Market Makers are required to hold a certain amount of their own capital as a percentage of client assets. The minimum capital requirement is currently set at 6% of reserves, similar to most banks and brokerage houses around the world. The minimum capital requirement ratio is checked through regular audits. If firms are losing money and the capital adequacy ratio falls below the minimum, regulators can seize the operation. Essentially Government regulators will stop the operation before the firm's own equity is fully used up and clients' funds are potentially dipped into. It is because of this supervision that regulated firms are a safe place to deposit money. Fleet bank plays a role in this cycle as the depository institution and has some of its own internal regulation and policies regarding firms that it is associated with, in addition to confirming audited numbers.

RefcoFX is based out of New York City. Please feel free to contact us if you have any further questions.

Kindest Regards,

And that concludes our review of the fixed rate options (also knows as single payment options trading and numerous other connotations) offered by the Refco and FXCM group of companies

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