PLAIN VANILLA STRATEGIES FOR FOREX OPTIONS TRADING - Singapore Forex Trading, Singapore Forex Academy, Singapore Forex Association

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PLAIN VANILLA STRATEGIES FOR FOREX OPTIONS TRADING

Buying calls and puts becomes the first base for trading forex options. As indicated earlier, a call or a put allows a leveraged position where the trader tries a directional play with limited risk to the premium paid. The major advantage is to avoid being stopped out of a position and having time for the position to work out. 

Time also is the enemy of the option trader who buys a position. Each trader in considering a call or put needs to have high confidence that the directional move of the underlying currency will be powerful enough to take the underlying into the money at the time of expiration.

Trading Forex Option Spreads 

Trading forex option spreads is a directional play that limits both the gains and the cost of participating. The most a trader can make is the difference between the strike prices. 

Spread trades offer the advantage of conserving trading capital. Their disadvantage is that in the case the underlying currency went beyond the strike prices, the trader could not participate in the move.

Calendar Spreads

This option trade allows the trader to put on a call or put spread with both legs at the same or different strike prices but at different months. 

In a call calendar spread, the trader anticipates that the currency pair will increase in value during this period of time. In a put spread, the idea is that the currency pair will decrease in value over the period of time. 

The advantage of the calendar spread over a regular spread is that in currency pairs, it allows a play on fundamental events that may take a bit longer. 

Calendar spreads can be used to play a country going through a shift in its economic cycle or sector or a seasonal effect that can occur in a currency.

Example: Buy JPY June, Sell September 

Calendar spreads can also be used as a way to trade a contraction of volatility. When the trader spots a condition where shortterm volatility is unusually higher than long-term volatility, he has detected a volatility smile. If he expects a contraction in this volatility, then a calendar spread would be an appropriate play on this.

Straddles 

This option trade is defined as buying a put and buying a call. The trader anticipates a very big move and would make money if the move occurs beyond the cost of the premium. 

The advantage of this strategy is that it doesn’t require the trader to predict which way the market will go. But if the move is not big enough, there is the strong risk of not being profitable.