European Sesion: FX-Exotic Options

Expert: Adam Rosen, PowerCourse Instructor at FXCM

Topics to be covered during the sesion:

-  Exotic options to reduce the risk
-  Speculate on potential breakout
-  Speculate in the FX market

Who is Adam Rosen?
Adam Rosen has worked for FXCM almost 3-years now, and on Wall st. for about 8-years in a number of capacities including trading: Equities, Options, FX, Fixed Income products, etc.

Currently Adam is the senior PowerCourse Instructor, administering a number of educational products to over 8,000 alumni over the past few years. He has also published a number of articles on www.dailyfx.com including a weekly trading lesson.

Adam has also traveled quite a bit speaking on a seminar circuit for FXCM to groups of traders and investors in settings of 50-600 individuals at a time.

Session Material:

1. Learn how to speculate in the FX market, and make money if the market moves, or if it doesn't move.
2. Learn strategies in selling high volatility markets, and speculate on potential breakouts.
3. Finally, we will address hedging your FX trades with exotic options to reduce the risk, and help us become profitable position traders.

Example #1: One Touch Options:
One-Touch set up:
• Look for conditions of decreasing volatility and the potential for a significant technical event. For example, the breach of a daily trend line.
• After confirmation, buy one-touch option when the market breaks out or breaks down in the anticipated direction.
• Best used when you expect a sharp rally or sharp decline in a relatively small amount of time.
• Expiry should reflect a proper amount of time, such as a few days based on a short-term chart, or a longer-period of time based on a daily or weekly chart.

As a result of the price breaking below the triangle support level and having the
expectation of the price moving lower in a quick fashion, we could purchase a 1
Touch Option with a barrier several hundred pips below the former support level.
As a result of the barrier price being so far from the current market price, this
Option will offer a great risk: reward ratio with a substantial payout, should the
Barrier be reached by expiration.

Click on image to enlarge

Example #2: Double One-Touch Options:
• Look for conditions of decreasing volatility within a clearly defined range.
• Buy double one-touch options where you think the market should go within a given period of time, best used when you expect a “choppy” trading range.
• Measure the distance of the range. Take 20% of that distance and subtract it from resistance. Take 20% of that distance and add it to support. These are the barriers.
• Mark the 50% level of the range, this is the ideal entry point...
• Expiry should reflect a proper amount of time, such as a few days based on a short-term chart, or a longer-period of time based on a daily or weekly chart.

Once the market has established a range, we measure the distance of the range. We subtract 20% of that distance from resistance and add 20% of that distance to support. We also mark the 50% level as well. As prices approach the 50% level, we buy a double one-touch option with strike prices at the 20% levels in anticipation of the market oscillating between the two levels.

Click on image to enlarge

Example #3: No-Touch-Options:
No-touch set up:
• Look for conditions of relative high volatility when the Bollinger Bands are wide apart.
• Buy no-touch options where you think the market “should not” go within a given period of time; above resistance or below support.
• Initiate trade when the market is as close to support or resistance as possible.
• Look for confirmation through other means of technical analysis such as double tops or bottoms, divergence, and candlestick patterns.
• Expiry should reflect a proper amount of time, such as a few days based on a short term chart, or a longer-period of time based on a daily or weekly chart.

Based on the following chart the market has now formed a “double bottom” pattern as the MACD has begun to rise during the same period of time. In addition, the recent candlesticks are trading very close to the lower Bollinger Band which is relatively wide apart from the upper band. This increased amount of volatility gives the trader a higher potential payout with a smaller relative premium. In addition, based on the daily charts, the market has a good chance to remain in its current trend. Based on these market conditions, a trader may want to consider buying a no touch with a strike price just below the red support line at 1.1900 with an expiration of 4 to 7 days.

Click on image to enlarge

Example #4: Double No-Touch Options:
Double No-Touch set up:
• Look for conditions of increased or relatively high volatility, within a clearly defined range.
• Best used when you expect the market to remain range bound
• Ideal entry point is as close to support and/or resistance as possible. Just above support or just below resistance would be optimum. You may enter both legs at the same time or individually.
• Could be used in times of relatively slow news flow, such as holidays or summer months.
• Expiry should reflect a proper amount of time, such as a few days based on a short-term chart, or a longer-period of time based on a daily or weekly chart.

If you believe the currency pair will remain within a range, you might buy a double no touch option with strikes outside the extremes of the recent range. You would buy strike prices that you do not expect to be “touched” before expiry. This is non-directional trade and is best employed during times of relatively slow news flow, where no sudden change in fundamental data or perception is anticipated.

Click on image to enlarge

Example #5: Digital Options:
Digital Options function in a similar manner to our “One-Touch” options in the sense we can express our belief that the market reach a specific price level within a given period of time. The inherent difference between the two types of options is as follows: One-Touch options payout if the market simply ‘touches’ a certain price level before expiration. On the other hand, a Digital option pays us only if the market is ‘above’ that price level at expiration. A one-touch option will payout even if the market has subsequently fallen back below the barrier level, or back above the barrier level. As long as the market touched the barrier level at least once prior to expiration, the option will payout. Therefore on the surface, it appears easier to trade one-touch options rather than digital options due to the fact that it doesn’t matter ‘where’ the market closes. However, because the probabilities of digital options closing “in the money” are less than simple one-touch options, the digital options have a greater payout % than one-touch options, relatively speaking.

For example, let’s take a look at the following 1-hour chart of the USD/JPY. The market has continued to make ‘higher-highs’ as the market has enjoyed a clear uptrend. If we believe the market will continue to rise past the 118.00 large round figure, and accomplish even higher highs, we have two different possible trades. We may purchase a one-touch option that will payout if the market at least touches 118.00 anytime over the course of the next 5-days. In order to receive a $100 payout, we must pay almost $89.00 in premium, giving us the potential to make around 12% return on our investment. This is partially due to the fact that that the Bollinger Bands are relatively wide apart and the increased state of volatility has made the one-touch options that much more expensive in relation to the fixed payout. On the other hand, we may purchase a digital option that will also payout $100 as long as the market “closes” at or above 118.00 at expiration; 5-days from now. The additional risk in the digital option is that the market may dip below 118.00 before expiration, which will result in a loss in the options trade. However, for this additional risk, our premium will only amount to around $48. As this option pays $100, the return on investment stands far better at 108%.

One-Touch Option: 118.00
Current market condition: 117.75
Premium: $88.89
Payout: $100
Expiration: 5-days
Return on Investment: 12.5%

Digital Call: 118.00
Current market condition: 117.75
Premium: $47.86
Payout: $100
Expiration: 5-days
Return of Investment: 108%

Therefore, we should look to the charts to determine which option is more suitable. Digital options can be used when we have a strong idea as far as the current trend. Although volatility is always a factor when trading options, it is not weighted as heavily in the digital options, and therefore allows us the potential for far greater returns than a simple one-touch option. With this said, One-touch options are better suited for low-volatility conditions where we expect the market to subsequently ‘break-out’ of its current quiet state, in the near future. However if the market has already become volatile, and we expect the current trend to continue, digital options may hold the solution to the trade.

Click on image to enlarge

Session Speach:

FXstreet Moderator (Oct 25, 2006 4:05:14 AM)
Welcome to FXstreet.com Q&A Forex Session. Today’s European session will start in 10 minutes.

FXstreet Moderator (Oct 25, 2006 4:14:34 AM)
This Q&A Sessions allows users to start asking live questions from the very first moment of the chat.

FXstreet Moderator (Oct 25, 2006 4:14:42 AM)
Please prepare any questions you may have for the expert. Thank you for joining today’s Q&A Session.

Adam Rosen - FXCM (Oct 25, 2006 4:15:29 AM)
Good morning...

FXstreet Moderator (Oct 25, 2006 4:16:12 AM)
Today I am delighted to welcome our guest speaker Adam Rosen, PowerCourse Instructor at FXCM.

FXstreet Moderator (Oct 25, 2006 4:16:27 AM)
Good morning Adam!

Adam Rosen - FXCM (Oct 25, 2006 4:16:32 AM)
good morning

Adam Rosen - FXCM (Oct 25, 2006 4:16:34 AM)
welcome to all

Adam Rosen - FXCM (Oct 25, 2006 4:16:42 AM)
we're glad to join everyone today

Adam Rosen - FXCM (Oct 25, 2006 4:16:52 AM)
we're going to spend some time together today

Adam Rosen - FXCM (Oct 25, 2006 4:16:58 AM)
discussing exotic options

Adam Rosen - FXCM (Oct 25, 2006 4:17:07 AM)
and specifically how they can be traded in the FX-market

Adam Rosen - FXCM (Oct 25, 2006 4:17:16 AM)
personally, (before we begin)

Adam Rosen - FXCM (Oct 25, 2006 4:17:39 AM)
i'd like to mention i've found exotic options can be used very effectively due to the specific nature of the fx market

Adam Rosen - FXCM (Oct 25, 2006 4:17:50 AM)
specifically, the FX market is known as a very 'range bound' market

Adam Rosen - FXCM (Oct 25, 2006 4:18:05 AM)
and one that tends not to break out to new high or low prices very often

Adam Rosen - FXCM (Oct 25, 2006 4:18:17 AM)
for example , if we were to look at a long term (daily) chart of the EURUSD

Adam Rosen - FXCM (Oct 25, 2006 4:18:34 AM)
we can see it's beeen quite some time since this currency pair has been able to accomplish a new high or low

Adam Rosen - FXCM (Oct 25, 2006 4:18:50 AM)
in fact this currency pair (like many) remains in a range on a long and short term basis

Adam Rosen - FXCM (Oct 25, 2006 4:19:12 AM)
with this in mind, traders in the FX market tend to rely on a range bound mentality (buy low, sell high)

Adam Rosen - FXCM (Oct 25, 2006 4:19:31 AM)
we can express our range bound opinion in the FX market by simply trading the spot market

Adam Rosen - FXCM (Oct 25, 2006 4:19:36 AM)
as we buy and sell currency pairs

Adam Rosen - FXCM (Oct 25, 2006 4:19:53 AM)
however options can be used to take advantage of certain aspects of the market

Adam Rosen - FXCM (Oct 25, 2006 4:20:04 AM)
to a better extent than the spot or cash market

Adam Rosen - FXCM (Oct 25, 2006 4:20:13 AM)
at any rate, let's begin

Adam Rosen - FXCM (Oct 25, 2006 4:20:22 AM)
we've provided a number of examples

Adam Rosen - FXCM (Oct 25, 2006 4:20:28 AM)
we can take a look at together today

Adam Rosen - FXCM (Oct 25, 2006 4:20:47 AM)
in example #1, we can see what's known as a "one-touch" setup

Adam Rosen - FXCM (Oct 25, 2006 4:21:04 AM)
for those of you who have traded conventional options (calls and puts)

Adam Rosen - FXCM (Oct 25, 2006 4:21:12 AM)
these options work in a slightly different manner

Adam Rosen - FXCM (Oct 25, 2006 4:21:32 AM)
in this case, a One Touch option allows us to express the opinion

Adam Rosen - FXCM (Oct 25, 2006 4:21:47 AM)
that the market will simply "touch" a certain price level within a given period of time

Adam Rosen - FXCM (Oct 25, 2006 4:22:05 AM)
now, before we move any further, it is important to understand options are priced a nubmer of different ways

Adam Rosen - FXCM (Oct 25, 2006 4:22:23 AM)
but essentially, the price varies according to 3 factors;

Adam Rosen - FXCM (Oct 25, 2006 4:22:24 AM)
price

Adam Rosen - FXCM (Oct 25, 2006 4:22:25 AM)
time

Adam Rosen - FXCM (Oct 25, 2006 4:22:28 AM)
and volatitliy

Adam Rosen - FXCM (Oct 25, 2006 4:22:37 AM)
in the case of the One Touch Options

Adam Rosen - FXCM (Oct 25, 2006 4:22:46 AM)
the closer the market is to our option

Adam Rosen - FXCM (Oct 25, 2006 4:22:56 AM)
the more expensive it becomes (to us to purchase)

Adam Rosen - FXCM (Oct 25, 2006 4:23:12 AM)
as a One Touch option states "I believe the market will touch" this price leve

Adam Rosen - FXCM (Oct 25, 2006 4:23:21 AM)
so for example

Adam Rosen - FXCM (Oct 25, 2006 4:23:31 AM)
the EURUSD is currently trading near 1.2550

Adam Rosen - FXCM (Oct 25, 2006 4:23:42 AM)
if we believe the EURUSD will move higher

Adam Rosen - FXCM (Oct 25, 2006 4:23:55 AM)
we may purchase a one touch option @ 1.2600, 1.2700, etc...

Adam Rosen - FXCM (Oct 25, 2006 4:24:09 AM)
the 1.2600 one touch will naturally be more expensive to purchase

Adam Rosen - FXCM (Oct 25, 2006 4:24:18 AM)
as it is closer to the current market price

Adam Rosen - FXCM (Oct 25, 2006 4:24:33 AM)
in addition to price, we must consider time

Adam Rosen - FXCM (Oct 25, 2006 4:24:45 AM)
the longer the expiration we choose when purchasing the one touch option

Adam Rosen - FXCM (Oct 25, 2006 4:25:04 AM)
the more expensive it becomes since a greater amount of time allows us a greater chance of being "right"

Adam Rosen - FXCM (Oct 25, 2006 4:25:31 AM)
therefore if we believe the EURUSD will move higher to 1.2700, we may purchase an option to expire 1 day from now, 1 week, etc...

Adam Rosen - FXCM (Oct 25, 2006 4:25:44 AM)
the 1 week options will become more expensive than the 1 day options

Adam Rosen - FXCM (Oct 25, 2006 4:25:52 AM)
the last factor to consider is volatilty

Adam Rosen - FXCM (Oct 25, 2006 4:26:00 AM)
we can measure volatilty a number of ways

Adam Rosen - FXCM (Oct 25, 2006 4:26:11 AM)
personally i prefer to simply use the Bollinger Bands indicator

Adam Rosen - FXCM (Oct 25, 2006 4:26:31 AM)
these two bands are set at 2 standard deviation of the 20-simple moving average

Adam Rosen - FXCM (Oct 25, 2006 4:26:40 AM)
the more volatile the market becomes the wider the bands become

Adam Rosen - FXCM (Oct 25, 2006 4:26:52 AM)
the less volatlie the market becomes, the closer the bands come together

Adam Rosen - FXCM (Oct 25, 2006 4:26:57 AM)
in the case of the one touch options

Adam Rosen - FXCM (Oct 25, 2006 4:27:10 AM)
the greater amount of volatilty, the more expensive one touch options will be

Adam Rosen - FXCM (Oct 25, 2006 4:27:27 AM)
due to the fact that the option simply looks at the market's historic volatilty

Adam Rosen - FXCM (Oct 25, 2006 4:27:45 AM)
and asks the quesiton "given the current condition, what is the chance the market will touch this level"

Adam Rosen - FXCM (Oct 25, 2006 4:28:09 AM)
therefore it is in our best interest to purchase one touch options when the market is least volatile

Adam Rosen - FXCM (Oct 25, 2006 4:28:14 AM)
and we expect a breakout

Adam Rosen - FXCM (Oct 25, 2006 4:28:22 AM)
this actually works in our favor

Adam Rosen - FXCM (Oct 25, 2006 4:28:33 AM)
as the market tends to become very quiet right before it breaks out

Adam Rosen - FXCM (Oct 25, 2006 4:28:40 AM)
similar to the "calm before the storm"

Adam Rosen - FXCM (Oct 25, 2006 4:28:56 AM)
we can see this very clearly as the market trades right before the release of an economic number

Adam Rosen - FXCM (Oct 25, 2006 4:29:05 AM)
such as the NFP (Non Farm Payrolls)

Adam Rosen - FXCM (Oct 25, 2006 4:29:15 AM)
or when the FED meets (which is actually today)

Adam Rosen - FXCM (Oct 25, 2006 4:29:57 AM)
over the next 12 hours, i expect the market to become very quiet as traders are simply waiting for the FOMC (Federal Open Market Committee) announces their decision on interest rates

Adam Rosen - FXCM (Oct 25, 2006 4:30:05 AM)
to summarize:

Adam Rosen - FXCM (Oct 25, 2006 4:30:28 AM)
if we are to buy one touch options, we should try to do so when the following criteria can be met:

Adam Rosen - FXCM (Oct 25, 2006 4:30:50 AM)
1. We can purchase the option strike price relativley close to the market's current price

Adam Rosen - FXCM (Oct 25, 2006 4:31:11 AM)
2. We can purchase the one touch option to expire in a relatively short amount of time

Adam Rosen - FXCM (Oct 25, 2006 4:31:35 AM)
3. The market's volatilty is relatively quiet, and therefore the options become cheaper to us

Adam Rosen - FXCM (Oct 25, 2006 4:31:53 AM)
In fact, in regards to one touch options, i have found they are best used to trade economic numbers

Adam Rosen - FXCM (Oct 25, 2006 4:32:19 AM)
for example, if we believe the FOMC will cut interest rates today, or they will make a negative statement

Adam Rosen - FXCM (Oct 25, 2006 4:32:27 AM)
we would expect the USD to move lower

Adam Rosen - FXCM (Oct 25, 2006 4:32:34 AM)
and in turn send the EURUSD higher

Adam Rosen - FXCM (Oct 25, 2006 4:32:57 AM)
if we expect this move to occur very quickly, we could simply purchase a one touch option above the EURUSD

Adam Rosen - FXCM (Oct 25, 2006 4:33:13 AM)
if the market simply touches this level before the option expires

Adam Rosen - FXCM (Oct 25, 2006 4:33:22 AM)
then we are paid out a pre-determined payout

Adam Rosen - FXCM (Oct 25, 2006 4:33:34 AM)
which obviously depends on (price, time, and volatlily)

Adam Rosen - FXCM (Oct 25, 2006 4:34:00 AM)
I would be happy to stop for any questions so far

Adam Rosen - FXCM (Oct 25, 2006 4:34:05 AM)
if there are any.........

FXstreet Moderator (Oct 25, 2006 4:34:38 AM)
Feel free to send your questions now.

Guest_aimareta (Oct 25, 2006 4:34:46 AM)
Would you agree in saying that the only real advantage of trading options instead of spot/cash forex is the fact that if you loose, you just loose the premium in most occasions?

Adam Rosen - FXCM (Oct 25, 2006 4:35:00 AM)
that is correct,

Adam Rosen - FXCM (Oct 25, 2006 4:35:16 AM)
one huge advantage of trading options is that we can never lose more than is bet

Adam Rosen - FXCM (Oct 25, 2006 4:35:32 AM)
if we buy a one touch option for $50, we can never lose more than $50

Adam Rosen - FXCM (Oct 25, 2006 4:35:36 AM)
in the spot market

Adam Rosen - FXCM (Oct 25, 2006 4:35:45 AM)
we can lose as much as we have in margin

Adam Rosen - FXCM (Oct 25, 2006 4:35:54 AM)
especially if we do not place a stop order

Adam Rosen - FXCM (Oct 25, 2006 4:36:00 AM)
no matter what happens,

Adam Rosen - FXCM (Oct 25, 2006 4:36:06 AM)
we cannot lose more than is placed on that trade

Adam Rosen - FXCM (Oct 25, 2006 4:36:08 AM)
and in addition

Adam Rosen - FXCM (Oct 25, 2006 4:36:17 AM)
often times (from personal experience)

Adam Rosen - FXCM (Oct 25, 2006 4:36:25 AM)
I would place a trade (spot market)

Adam Rosen - FXCM (Oct 25, 2006 4:36:31 AM)
only to move my stop order

Adam Rosen - FXCM (Oct 25, 2006 4:36:35 AM)
take away my limit order

Adam Rosen - FXCM (Oct 25, 2006 4:36:48 AM)
reverse the position, or simply second guess myself later

Adam Rosen - FXCM (Oct 25, 2006 4:37:02 AM)
the options do not allow us to change our mind once the trade is placed

Adam Rosen - FXCM (Oct 25, 2006 4:37:22 AM)
so often, i would reverse the postiion, only to see my original trade idea follow through to fruition

Adam Rosen - FXCM (Oct 25, 2006 4:37:46 AM)
when trading options, if our first intention was correct, then we will make money on the trade; no second guessing allowed

Adam Rosen - FXCM (Oct 25, 2006 4:37:56 AM)
please feel free to send any questions you may have.....

Guest_mike-22 (Oct 25, 2006 4:38:03 AM)
which of the types of options would you consider the most potentially profitable?

Adam Rosen - FXCM (Oct 25, 2006 4:38:09 AM)
great question,

Adam Rosen - FXCM (Oct 25, 2006 4:38:30 AM)
we're going to address a number of different options

Adam Rosen - FXCM (Oct 25, 2006 4:38:42 AM)
their pricing all depends on price, time, and volaltily

Adam Rosen - FXCM (Oct 25, 2006 4:38:58 AM)
overall i've found the one touch options to have the biggest payout / risk

Adam Rosen - FXCM (Oct 25, 2006 4:39:01 AM)
however on the same note

Adam Rosen - FXCM (Oct 25, 2006 4:39:07 AM)
they are the most difficult to trade

Adam Rosen - FXCM (Oct 25, 2006 4:39:15 AM)
as we have to be almost exactly right

Adam Rosen - FXCM (Oct 25, 2006 4:39:21 AM)
and therefore their not may favorite

Adam Rosen - FXCM (Oct 25, 2006 4:39:47 AM)
Personally, i have found the greatest amount of sucess trading No touch options which we're going to cover in a moment

Adam Rosen - FXCM (Oct 25, 2006 4:39:59 AM)
any more questions please>......

Adam Rosen - FXCM (Oct 25, 2006 4:40:45 AM)
we're going to have quite a bit of time to go over questions today, I'd like to contiue

Adam Rosen - FXCM (Oct 25, 2006 4:40:52 AM)
as we have a great deal to cover

Adam Rosen - FXCM (Oct 25, 2006 4:40:57 AM)
in example #2

Adam Rosen - FXCM (Oct 25, 2006 4:41:10 AM)
we are now looking at a double one touch option

Adam Rosen - FXCM (Oct 25, 2006 4:41:27 AM)
this works in a very simliar way to the one touch

Adam Rosen - FXCM (Oct 25, 2006 4:41:44 AM)
however we can recieve a payout if the market breaks in either direction

Adam Rosen - FXCM (Oct 25, 2006 4:41:58 AM)
this can be used most effectly

Adam Rosen - FXCM (Oct 25, 2006 4:42:04 AM)
if we believe the market will break

Adam Rosen - FXCM (Oct 25, 2006 4:42:09 AM)
but we're not sure in which direction

Adam Rosen - FXCM (Oct 25, 2006 4:42:25 AM)
this may occur after the market has been in a range bound market for quite a bit of time

Adam Rosen - FXCM (Oct 25, 2006 4:42:32 AM)
looking to a daily chart of the EURJPY

Adam Rosen - FXCM (Oct 25, 2006 4:42:39 AM)
we can see the market has become very very quiet

Adam Rosen - FXCM (Oct 25, 2006 4:42:50 AM)
trading in a range between 149.00 and 150.00

Adam Rosen - FXCM (Oct 25, 2006 4:43:00 AM)
eventuallly we know the market will break one way or the other

Adam Rosen - FXCM (Oct 25, 2006 4:43:15 AM)
once the market breaks out, we may see it move to 151 or 148

Adam Rosen - FXCM (Oct 25, 2006 4:43:23 AM)
so we may purchase a double one touch optioin

Adam Rosen - FXCM (Oct 25, 2006 4:43:36 AM)
that will pay us if the market touches either direction

Adam Rosen - FXCM (Oct 25, 2006 4:43:54 AM)
these options are generally quite expensive

Adam Rosen - FXCM (Oct 25, 2006 4:44:14 AM)
as it is asking the question "what is the chance that the market will either touch 148.00 or 151.00"

Adam Rosen - FXCM (Oct 25, 2006 4:44:31 AM)
the chance is very likley (of course depending on price, time, and volatlity)

Adam Rosen - FXCM (Oct 25, 2006 4:44:41 AM)
therefore the payouts are usually not as lucrative

Adam Rosen - FXCM (Oct 25, 2006 4:44:56 AM)
however a good amount of time, the lower the payout, the higher the probablity that this event will occur

Adam Rosen - FXCM (Oct 25, 2006 4:45:24 AM)
so the payout that pays us 20:1 is much less likely to occur than the option that will payout 3:1

Adam Rosen - FXCM (Oct 25, 2006 4:45:54 AM)
I'd like to get right to example #3, as No Touch options by far are my favorite way to play the FX market

Adam Rosen - FXCM (Oct 25, 2006 4:46:04 AM)
No touch options simply allow us to state the opinion

Adam Rosen - FXCM (Oct 25, 2006 4:46:23 AM)
"I believe the market will not touch a certain price level "

Adam Rosen - FXCM (Oct 25, 2006 4:46:39 AM)
we can see many times, on the long term charts such as the daily charts

Adam Rosen - FXCM (Oct 25, 2006 4:46:56 AM)
the market will reach an obvious price level that it just cannot seem to break

Adam Rosen - FXCM (Oct 25, 2006 4:47:14 AM)
in this case we would buy a no touch option at a price level the market "should not" touch

Adam Rosen - FXCM (Oct 25, 2006 4:47:21 AM)
within a given period of time

Adam Rosen - FXCM (Oct 25, 2006 4:47:34 AM)
the price, time, volatliy factor works a little different here

Adam Rosen - FXCM (Oct 25, 2006 4:47:57 AM)
PRICE: The closer the option is to the current market, the cheaper it becomes to us to buy

Adam Rosen - FXCM (Oct 25, 2006 4:48:16 AM)
this is because a no touch option states we think the market SHOULD NOT touch a certain price level

Adam Rosen - FXCM (Oct 25, 2006 4:48:47 AM)
if the EURUSD is trading @ 1.2550, a 1.2650 no touch option will be a lot less expensive to buy than a 1.2750 option

Adam Rosen - FXCM (Oct 25, 2006 4:49:00 AM)
since it is more likely the market will touch 1.2650 than 1.2750

Adam Rosen - FXCM (Oct 25, 2006 4:49:13 AM)
TIME: the greater amount of time we select

Adam Rosen - FXCM (Oct 25, 2006 4:49:24 AM)
the cheaper it becomes to us to purchase

Adam Rosen - FXCM (Oct 25, 2006 4:49:45 AM)
what are the chances the EURUSD does not touch 1.2700 in 1 day, 1 week, or 1 year......

Adam Rosen - FXCM (Oct 25, 2006 4:50:02 AM)
it may not be likely the option does not touch this price leve today

Adam Rosen - FXCM (Oct 25, 2006 4:50:05 AM)
but in 1 month

Adam Rosen - FXCM (Oct 25, 2006 4:50:11 AM)
it is obviously more likely

Adam Rosen - FXCM (Oct 25, 2006 4:50:17 AM)
3. VOLATILTY:

Adam Rosen - FXCM (Oct 25, 2006 4:50:33 AM)
as the market becomes more volatile, the option also becomes cheaper to purchase

Adam Rosen - FXCM (Oct 25, 2006 4:50:46 AM)
since the option measures the current state of volatlty

Adam Rosen - FXCM (Oct 25, 2006 4:51:09 AM)
the more volatile the market is currently, the greater the likelyhood that the market will touch a certain level

Adam Rosen - FXCM (Oct 25, 2006 4:51:20 AM)
and therefore less expensive to purchase

Adam Rosen - FXCM (Oct 25, 2006 4:51:51 AM)
to summarize, i like to purchase no touch options very close to the current market, over a very long period of time, when the market is very volatile

Adam Rosen - FXCM (Oct 25, 2006 4:52:05 AM)
however with this in mind, it is very important to buy these options

Adam Rosen - FXCM (Oct 25, 2006 4:52:16 AM)
at a price level we honestly believe the market should not trade to

Adam Rosen - FXCM (Oct 25, 2006 4:52:32 AM)
we should do so, when the market is trading very close to a long term support or resistance

Adam Rosen - FXCM (Oct 25, 2006 4:52:55 AM)
looking at the daily chart of the EURJPY, i may purchase a no touch option above 151.00 since the market has yet to touch this level

Adam Rosen - FXCM (Oct 25, 2006 4:53:21 AM)
or in the case of the USDJPY, perhaps a no touch option at 121.00 would be appropriate

Adam Rosen - FXCM (Oct 25, 2006 4:53:37 AM)
we've covered a great deal of information so far,........

Adam Rosen - FXCM (Oct 25, 2006 4:53:45 AM)
i'll be happy to take any questions..............

Guest_aimareta (Oct 25, 2006 4:54:19 AM)
Is there a way to trade a hedge, arbitrage or try to cover an options position? thank you.

Adam Rosen - FXCM (Oct 25, 2006 4:54:31 AM)
excellent question,.....

Adam Rosen - FXCM (Oct 25, 2006 4:54:52 AM)
i have spent countless hours thinking of different ways to use these options in conjunction with the spot market

Adam Rosen - FXCM (Oct 25, 2006 4:54:57 AM)
to hedge positions

Adam Rosen - FXCM (Oct 25, 2006 4:55:01 AM)
and other simliar strategies

Adam Rosen - FXCM (Oct 25, 2006 4:55:11 AM)
i've discovered a few specific ways we can do so

Adam Rosen - FXCM (Oct 25, 2006 4:55:25 AM)
1. we can use a one touch option to hedge an economic number

Adam Rosen - FXCM (Oct 25, 2006 4:55:58 AM)
for example, lets assume before the FOMC meets, the EURUSD is trading at 1.2600, and we believe after the meeting, the EURUSD will move higher

Adam Rosen - FXCM (Oct 25, 2006 4:56:01 AM)
and not move lower

Adam Rosen - FXCM (Oct 25, 2006 4:56:19 AM)
i would then simply buy the EURUSD in the cash market (1-mini lot, etc.....)

Adam Rosen - FXCM (Oct 25, 2006 4:56:35 AM)
I would obviously want to put a relatvely wide stop order

Adam Rosen - FXCM (Oct 25, 2006 4:56:49 AM)
as the economic numbers can send the market into a very volatile condition

Adam Rosen - FXCM (Oct 25, 2006 4:57:06 AM)
I would put my stop order for the spot position lower, let's say at 1.2450

Adam Rosen - FXCM (Oct 25, 2006 4:57:30 AM)
to hedge this position, i may choose to purchase a 1-touch option before the meeting

Adam Rosen - FXCM (Oct 25, 2006 4:57:47 AM)
at a strike price exactly where my stop order is (1.2450)

Adam Rosen - FXCM (Oct 25, 2006 4:57:53 AM)
so if the market moves higher,

Adam Rosen - FXCM (Oct 25, 2006 4:58:12 AM)
i will make money on the spot market, and lose a relativley small amount on the option

Adam Rosen - FXCM (Oct 25, 2006 4:58:19 AM)
however if the market moves down

Adam Rosen - FXCM (Oct 25, 2006 4:58:33 AM)
the option payout will offset the loss from my trade being stopped out

Adam Rosen - FXCM (Oct 25, 2006 4:58:43 AM)
this is one way to use one touch options

Adam Rosen - FXCM (Oct 25, 2006 4:58:56 AM)
another solution is through the use of no touch options

Adam Rosen - FXCM (Oct 25, 2006 4:59:02 AM)
if we have a profitable position

Adam Rosen - FXCM (Oct 25, 2006 4:59:18 AM)
lets assume we bought the EURUSD at 1.2600 and now it's trading at 1.2750

Adam Rosen - FXCM (Oct 25, 2006 4:59:34 AM)
i may want to protect the 150- pips of profit (nice trade)

Adam Rosen - FXCM (Oct 25, 2006 5:02:40 AM)
I apologize for the technical difficutly,

FXstreet Moderator (Oct 25, 2006 5:02:54 AM)
We apologize for the Technical issues, Please send your questions again. Thank you.

Adam Rosen - FXCM (Oct 25, 2006 5:03:06 AM)
welcome back.....

Adam Rosen - FXCM (Oct 25, 2006 5:03:33 AM)
to finish the previous statetement

Adam Rosen - FXCM (Oct 25, 2006 5:03:56 AM)
if we have a profitable position, we can purchase a no touch option above the current market

Adam Rosen - FXCM (Oct 25, 2006 5:04:18 AM)
for example, let's assume we bought the EURUSD @ 1.2600, and the market is now 1.2800

Adam Rosen - FXCM (Oct 25, 2006 5:04:27 AM)
i may choose to purchase a no touch option at 1.2900

Adam Rosen - FXCM (Oct 25, 2006 5:04:33 AM)
so if the market continues higher

Adam Rosen - FXCM (Oct 25, 2006 5:04:53 AM)
we will lose a small amount of the option, but make that much more on our spot position,

Adam Rosen - FXCM (Oct 25, 2006 5:05:02 AM)
and if the market reverses back to the downside

Adam Rosen - FXCM (Oct 25, 2006 5:05:09 AM)
we can offset the spot postiion

Adam Rosen - FXCM (Oct 25, 2006 5:05:14 AM)
with profits from the option

Adam Rosen - FXCM (Oct 25, 2006 5:05:28 AM)
if there are no questions, there are a few other things i'd love to go over........

Adam Rosen - FXCM (Oct 25, 2006 5:06:03 AM)
Example #4 address "Double No Touch" options

Adam Rosen - FXCM (Oct 25, 2006 5:06:14 AM)
this is basically a combination of two no touch options

Adam Rosen - FXCM (Oct 25, 2006 5:06:35 AM)
and states that we believe the market will not touch a certain high or certain low

Adam Rosen - FXCM (Oct 25, 2006 5:06:49 AM)
this should be used if we believe the market will remain in a trading range

Adam Rosen - FXCM (Oct 25, 2006 5:06:55 AM)
after a very volatile period

Adam Rosen - FXCM (Oct 25, 2006 5:07:29 AM)
so for example, we may purchase a double no touch option on the EURJPY at 151 and 148 if we believe the market will remain and not touch either level

Adam Rosen - FXCM (Oct 25, 2006 5:07:37 AM)
however just like other options,

Adam Rosen - FXCM (Oct 25, 2006 5:07:52 AM)
these should be purchased with time, price, and volatiltiy is in our favor

Adam Rosen - FXCM (Oct 25, 2006 5:08:10 AM)
example #5 discusses Digital Options

Adam Rosen - FXCM (Oct 25, 2006 5:08:21 AM)
which work in a slightly different manner

Adam Rosen - FXCM (Oct 25, 2006 5:08:25 AM)
this asks the question.

Adam Rosen - FXCM (Oct 25, 2006 5:08:44 AM)
what is the chance the market will "Close" above or below a certain price level

Adam Rosen - FXCM (Oct 25, 2006 5:08:59 AM)
the other options we used in the past, simply need to "touch" a price level

Adam Rosen - FXCM (Oct 25, 2006 5:09:13 AM)
digitial options require the market to close at a certain level

Adam Rosen - FXCM (Oct 25, 2006 5:09:25 AM)
they can be used to substitute a one touch option

Adam Rosen - FXCM (Oct 25, 2006 5:09:33 AM)
during volatile market conditions

Adam Rosen - FXCM (Oct 25, 2006 5:09:51 AM)
due to the fact that digital options do not use volatitly as much as one touch options

Adam Rosen - FXCM (Oct 25, 2006 5:10:10 AM)
and therefore they do get as expensive as on touch options during very volatie times

Adam Rosen - FXCM (Oct 25, 2006 5:10:18 AM)
this can be used a number of different ways

Adam Rosen - FXCM (Oct 25, 2006 5:10:22 AM)
for example,

Adam Rosen - FXCM (Oct 25, 2006 5:10:33 AM)
if we believe the USDJPY will reverse back to the downside

Adam Rosen - FXCM (Oct 25, 2006 5:10:39 AM)
we may choose to sell short the pair

Adam Rosen - FXCM (Oct 25, 2006 5:10:50 AM)
but the carry (interest charged every day)

Adam Rosen - FXCM (Oct 25, 2006 5:10:59 AM)
may add up to quite a bit if we hold the posiiton a long time

Adam Rosen - FXCM (Oct 25, 2006 5:11:15 AM)
so digital options can be used in exchange of these options

Adam Rosen - FXCM (Oct 25, 2006 5:11:29 AM)
I'll be more than happy to take any questions.....

Adam Rosen - FXCM (Oct 25, 2006 5:12:50 AM)
a great deal of information can be found on exotic options at our options page:

Adam Rosen - FXCM (Oct 25, 2006 5:12:51 AM)
http://www.forex-options.com/

Adam Rosen - FXCM (Oct 25, 2006 5:13:17 AM)
you may register for free demo practice account, and this account can be used to trade on our FX Trading Station as well

Guest_mingi (Oct 25, 2006 5:13:25 AM)
what about forex futures to avoid carry interest

Adam Rosen - FXCM (Oct 25, 2006 5:13:29 AM)
to practice different hedging strategies as well

Adam Rosen - FXCM (Oct 25, 2006 5:13:34 AM)
good question

Adam Rosen - FXCM (Oct 25, 2006 5:13:56 AM)
personally, i have not traded futures as I prefer to trade the spot market with a higher amount of leverage

Adam Rosen - FXCM (Oct 25, 2006 5:14:19 AM)
i believe the higher amount of leverage far outweighs the daily interest charge

Adam Rosen - FXCM (Oct 25, 2006 5:14:24 AM)
but for the most part,

Adam Rosen - FXCM (Oct 25, 2006 5:14:38 AM)
whenever possible, i try to trade only in the same direction as the carry

Adam Rosen - FXCM (Oct 25, 2006 5:14:47 AM)
this is not only due to the interest charge

Adam Rosen - FXCM (Oct 25, 2006 5:15:00 AM)
but i've found long term trends tend to favor the direction of the carry

Adam Rosen - FXCM (Oct 25, 2006 5:15:20 AM)
we can look to the long term charts of the EURJPY, GBPJPY, or other pairs with a great difference in interest

Adam Rosen - FXCM (Oct 25, 2006 5:15:41 AM)
and see the long term trends tend to move in the same direction as that currency with a higher amount of interest

Adam Rosen - FXCM (Oct 25, 2006 5:15:46 AM)
questions please.....

Guest_Sham (Oct 25, 2006 5:15:52 AM)
what about fibo levels will it help in make dissision of buy or sell currancies, thanks

Adam Rosen - FXCM (Oct 25, 2006 5:16:09 AM)
i'm glad you brought that up

Adam Rosen - FXCM (Oct 25, 2006 5:16:20 AM)
Fibonacci levels are very important

Adam Rosen - FXCM (Oct 25, 2006 5:16:32 AM)
as they tell us where the market may find future support or resistane

Adam Rosen - FXCM (Oct 25, 2006 5:16:38 AM)
for example:

Adam Rosen - FXCM (Oct 25, 2006 5:16:44 AM)
if the market is trending to the upside

Adam Rosen - FXCM (Oct 25, 2006 5:16:55 AM)
and pulls back to a Fibonacci level such as 38.2%

Adam Rosen - FXCM (Oct 25, 2006 5:17:16 AM)
i may choose to purchase a no touch option below that Fibonacci level, such as near the 50% level

Adam Rosen - FXCM (Oct 25, 2006 5:17:29 AM)
(assuming we believe the market will not move lower)

Adam Rosen - FXCM (Oct 25, 2006 5:17:39 AM)
and if we're right, and the market continues higher

Adam Rosen - FXCM (Oct 25, 2006 5:17:47 AM)
the option will expire and pay us out

Adam Rosen - FXCM (Oct 25, 2006 5:17:56 AM)
it's important not to buy these options too close

Adam Rosen - FXCM (Oct 25, 2006 5:18:02 AM)
as a trade that is stopped out

Adam Rosen - FXCM (Oct 25, 2006 5:18:10 AM)
simply means a loss

Adam Rosen - FXCM (Oct 25, 2006 5:18:18 AM)
it's better to make a small amount of money

Adam Rosen - FXCM (Oct 25, 2006 5:18:22 AM)
than lose a lot

Adam Rosen - FXCM (Oct 25, 2006 5:18:29 AM)
questions please...

Guest_mingi (Oct 25, 2006 5:19:08 AM)
what about pivots?

Adam Rosen - FXCM (Oct 25, 2006 5:19:16 AM)
another great point

Adam Rosen - FXCM (Oct 25, 2006 5:19:22 AM)
just like the fibonacci levels

Adam Rosen - FXCM (Oct 25, 2006 5:19:34 AM)
pivot points approximate future potential support and resistance

Adam Rosen - FXCM (Oct 25, 2006 5:19:52 AM)
we can purchase no touch options or double no touch options above and below pivot points

Adam Rosen - FXCM (Oct 25, 2006 5:20:04 AM)
if we believe the market will remain inside the two price levels

Adam Rosen - FXCM (Oct 25, 2006 5:20:17 AM)
remember to always check the bollinger bands

Adam Rosen - FXCM (Oct 25, 2006 5:20:32 AM)
if they bands are wide apart, no touch and double no touch options may be more appropriate

Adam Rosen - FXCM (Oct 25, 2006 5:20:46 AM)
if the bands are close together, one touch or double one touch options may be more appropriate

Adam Rosen - FXCM (Oct 25, 2006 5:21:09 AM)
if there are no further questions............?

Guest_mingi (Oct 25, 2006 5:21:44 AM)
excellent session - thank you

Adam Rosen - FXCM (Oct 25, 2006 5:22:02 AM)
you're too kind, thank you very much

Adam Rosen - FXCM (Oct 25, 2006 5:22:04 AM)
I would sincerely like to thank everyone for participating in our options webinar. Again, you may access our options platform @ http://www.forex-options.com/

FXstreet Moderator (Oct 25, 2006 5:22:05 AM)
That’s all we have time for Today .Thank you very much for that Adam!

Adam Rosen - FXCM (Oct 25, 2006 5:22:55 AM)
my pleasure, please feel free to contact us at any time 24/7 @ http://www.fxcm.com/contact-fxcm.jsp

FXstreet Moderator (Oct 25, 2006 5:23:19 AM)
Thank you all for your participation. See you soon!

Adam Rosen - FXCM (Oct 25, 2006 5:23:20 AM)
have a great day, and may every one of your trades be winning ones!!!

Comments

[Kristoph]

Excellent session. I've been searching the net for forex options (both plain vanilla and exotic) and have found nothing practical like this. Can someone point out programs/books/websites/other resources regarding this for me?

Thank you