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04-28-2008, 01:45 PM
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Forex Options, a different way to trade
Few brokers offers Forex Options, maybe this is why are not so popular.
The idea of this thread is to make a tutorial about this particular way of trading. But first: what is an option? Quote:
read the full article: read the introductory full article:
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05-02-2008, 12:48 PM
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A put option (sometimes simply called a "put") is a financial contract between two parties, the seller (writer) and the buyer of the option. The put allows the buyer the right but not the obligation to sell a commodity or financial instrument (the underlying instrument) to the writer (seller) of the option at a certain time for a certain price (the strike price). The writer (seller) has the obligation to purchase the underlying asset at that strike price, if the buyer exercises the option.
Note that the writer of the option is agreeing to buy the underlying asset if the buyer exercises the option. In exchange for having this option, the buyer pays the writer (seller) a fee (the premium). (Note: Although option writers are frequently referred to as sellers, because they initially sell the option that they create, thus taking a short position in the option, they are not the only sellers. An option holder can also sell his long position in the option. However, the difference between the two sellers is that the option writer takes on the legal obligation to buy the underlying asset at the strike price, whereas the option holder is merely selling his long position, and is not contractually obligated by the sold option.) Exact specifications may differ depending on option style. A European put option allows the holder to exercise the put option for a short period of time right before expiration. An American put option allows exercise at any time during the life of the option. The most widely-known put option is for stock in a particular company. However, options are traded on many other assets: financial - such as interest rates (see interest rate floor) - and physical, such as gold or crude oil. The put buyer either believes it's likely the price of the underlying asset will fall by the exercise date, or hopes to protect a long position in the asset. The advantage of buying a put over shorting the asset is that the risk is limited to the premium. The put writer does not believe the price of the underlying security is likely to fall. The writer sells the put to collect the premium. Puts can also be used to limit portfolio risk, and may be part of an option spread. Example of a put option on a stock Buy a Put: Buyer thinks price of a stock will decrease. Pay a premium which buyer will never get back. The buyer has the right to sell the stock at strike price.Write a put: Writer receives a premium. If buyer exercises the option, writer will buy the stock at strike price. If buyer does not exercise the option, writer's profit is premium. 'Trader A' (Put Buyer) purchases a put contract to sell 100 shares of XYZ Corp. to 'Trader B' (Put Writer) for $50/share. The current price is $55/share, and 'Trader A' pays a premium of $5/share. If the price of XYZ stock falls to 40/share right before expiration, then 'Trader A' can exercise the put by buying 100 shares for $4,000 from the stock market, then selling them to 'Trader B' for $5,000. Trader A's total earnings (S) can be calculated at $500. Sale of the 100 stock at strike price of $50 to 'Trader B' = $5,000 (P) Purchase of 100 stock at $40 = $4,000 (Q) Put Option premium paid to Trader B for buying the contract of 100 shares @ $5/share, excluding commissions = $500 (R) S=P-(Q+R)=$5,000-($4,000+$500)=$500 If, however, the share price never drops below the strike price (in this case, $50), then 'Trader A' would not exercise the option. (Why sell a stock to 'Trader B' at $50, if it would cost 'Trader A' more than that to buy it?). Trader A's option would be worthless and he would have lost the whole investment, the fee (premium) for the option contract, $500 (5/share, 100 shares per contract). Trader A's total loss are limited to the cost of the put premium plus the sales commission to buy it. From Wikipedia, the free encyclopedia: See full article.
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05-02-2008, 12:51 PM
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A call option is a financial contract between two parties, the buyer and the seller of this type of option. Often it is simply labeled a "call". The buyer of the option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying instrument) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right.
The buyer of a call option wants the price of the underlying instrument to rise in the future; the seller either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price (see below for examples). Call options are most profitable for the buyer when the underlying instrument is moving up, making the price of the underlying instrument closer to the strike price. When the price of the underlying instrument surpasses the strike price, the option is said to be "in the money". The initial transaction in this context (buying/selling a call option) is not the supplying of a physical or financial asset (the underlying instrument). Rather it is the granting of the right to buy the underlying asset, in exchange for a fee - the option price or premium. Exact specifications may differ depending on option style. A European call option allows the holder to exercise the option (i.e., to buy) only on the option expiration date. An American call option allows exercise at any time during the life of the option. Call options can be purchased on many financial instruments other than stock in a corporation. Options can be purchased on futures on interest rates, for example (see interest rate cap), and on commodities like gold or crude oil. A tradeable call option should not be confused with either Incentive stock options or with a warrant. An incentive stock option, the option to buy stock in a particular company, is a right granted by a corporation to a particular person (typically executives) to purchase treasury stock. When an incentive stock option is exercised, new shares are issued. Incentive stock options are not traded on the open market. In contrast, when a call option is exercised, the underlying asset is transferred from one owner to another. Example of a call option on a stock Buy a call: The buyer expects that the price may go up. The buyer pays a premium that he will never get back. He has the right to exercise the option at the strike price. Write a call: The writer receives the premium. If the buyer decides to exercise the option, then the writer has to sell the stock at the strike price. If the buyer does not exercise the option, then the writer profits the premium.'Trader A' (Call Buyer) purchases a Call contract to buy 100 shares of XYZ Corp from 'Trader B' (Call Writer) at $50/share. The current price is $45/share, and 'Trader A' pays a premium of $5/share. If the share price of XYZ stock rises to $60/share right before expiration, then 'Trader A' can exercise the call by buying 100 shares for $5,000 from 'Trader B' and sell them at $6,000 in the stock market. Trader A's total earnings (S) can be calculated at $500. Sale of 100 stock at $60 = $6,000 (P) Amount paid to 'Trader B' for the 100 stock bought at strike price of $50 = $5,000 (Q) Call Option premium paid to Trader B for buying the contract of 100 shares @ $5/share, excluding commissions = $500 (R) S=P-(Q+R)=$6,000-($5,000+$500)=$500If, however, the price of XYZ drops to $40/share below the strike price, then 'Trader A' would not exercise the option. (Why buy a stock from 'Trader B' at 50, the strike price when it can be bought at $40 in the stock market?). Trader A's option would be worthless and the whole investment, the fee (premium) for the option contract, $500 (5/share, 100 shares per contract). Trader A's total loss is limited to the cost of the call premium plus the sales commission to buy it. From Wikipedia, the free encyclopedia: See full article.
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05-02-2008, 12:55 PM
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Foreign exchange option
In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date.
The FX options market is the deepest, largest and most liquid market for options of any kind in the world. Most of the FX option volume is traded OTC and is lightly regulated, but a fraction is traded on exchanges like the Philadelphia Stock Exchange, or the Chicago Mercantile Exchange for options on futures contracts: the global market for exchange-traded currency options is notionally valued by the Bank for International Settlements at $158,300 million in 2005. For example a GBPUSD FX option might be specified by a contract allowing the owner to sell £1,000,000 and buy $2,000,000 on December 31. In this case the pre-agreed exchange rate, or strike price, is 2.0000 GBPUSD or 0.5000 USDGBP and the notionals are £1,000,000 and $2,000,000 (£1,000,000 from the eyes of a USD investor, $2,000,000 from the eyes of a GBP investor). This type of contract is both a call on dollars and a put on sterling, and is often called a GBPUSD put by market participants, as it is a put on the exchange rate; it could equally be called a USDGBP call, but isn't, as market convention is to quote the 2.0000 number (normal quote), not the 0.5000 number (inverse quote). If the rate is lower than 2.0000 GBPUSD come December 31 (say at 1.9000 GBPUSD), meaning that the dollar is stronger and the pound is weaker, then the option will be exercised, allowing the owner to sell GBP at 2.0000 and immediately buy it back in the spot market at 1.9000, making a profit of (2.0000 USD/GBP - 1.9000 USD/GBP)*1,000,000 GBP = 100,000 USD in the process. If they immediately exchanges their profit into GBP, this amounts to 100,000/1.9000 = 52,631.58 GBP. Generally in thinking about options, one assumes that one is buying an asset: for instance, you can have a call option on oil, which allows you to buy oil at a given price. One can consider this situation more symmetrically in FX, where one exchanges: a put on GBPUSD allows one to exchange GBP for USD: it is at once a put on GBP and a call on USD. As a vivid example: people usually consider that in a fast food restaurant, one buys hamburgers and pays in dollars, but one can instead say that the restaurant buys dollars and pays in hamburgers. There are a number of subtleties that follow from this symmetry. Ratio of notionalsThe ratio of the notionals in an FX option is the strike, not the current spot or forward. Notably, when constructing an option strategy from FX options, one must be careful to match the foreign currency notionals, not the local currency notionals, else the foreign currencies received and delivered don't offset and one is left with residual risk.Non-linear payoffThe payoff for a vanilla option is linear in the underlying, when one denominates the payout in a given numéraire. In the case of an FX option on a rate, one must be careful of which currency is the underlying and which in the numéraire: in the above example, an option on GBPUSD gives a USD value that is linear in GBPUSD (a move from 2.0000 to 1.9000 yields a .10 * $2,000,000 / 2.0000 = $100,000 profit), but has a non-linear GBP value in GBPUSD. Conversely, the GBP value is linear in the USDGBP rate, while the USD value is non-linear in the USDGBP rate. This is because inverting a rate has the effect of  , which is non-linear.Change of numérairethe implied volatility of an FX option depends on the numéraire of the purchaser, again because of the non-linearity of .Corporations primarily use FX options to hedge uncertain future cash flows in a foreign currency. The general rule is to hedge certain foreign currency cash flows with forwards, and uncertain foreign cash flows with options. Suppose a United Kingdom manufacturing firm is expecting to be paid US$100,000 for a piece of engineering equipment to be delivered in 90 days. If the GBP strengthen against the US$ over the next 90 days the UK firm will lose money, as it will receive less GBP when the US$100,000 is converted into GBP. However, if the GBP weaken against the US$, then the UK firm will gain additional money: the firm is exposed to FX risk. Assuming that the cash flow is certain, the firm can enter into a forward contract to deliver the US$100,000 in 90 days time, in exchange for GBP at the current forward rate. This forward contract is free, and, presuming the expected cash arrives, exactly matches the firm's exposure, perfectly hedging their FX risk. If the cash flow is uncertain, the firm will likely want to use options: if the firm enters a forward FX contract and the expected USD cash is not received, then the forward, instead of hedging, exposes the firm to FX risk in the opposite direction. Using options, the UK firm can purchase a GBP call/USD put option (the right to sell part or all of their expected income for pounds sterling at a predetermined rate), which will:
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05-02-2008, 01:00 PM
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Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security, or in a futures contract. In other words, the holder does not have to exercise this right, unlike a forward or future. For example, buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or before expiration, while buying a put option provides the right to sell. Upon the option holder's choice to exercise the option, the party who sold, or wrote, the option must fulfill the terms of the contract.[1][2]
The theoretical value of an option can be determined by a variety of techniques. These models, which are developed by quantitative analysts, can also predict how the value of the option will change in the face of changing conditions. Hence, the risks associated with trading and owning options can be understood and managed with some degree of precision. Exchange-traded options form an important class of options which have standardized contract features and trade on public exchanges, facilitating trading among independent parties. Over-the-counter options are traded between private parties, often well-capitalized institutions, that have negotiated separate trading and clearing arrangements with each other. Another important class of options, particularly in the U.S., are employee stock options, which are awarded by a company to their employees as a form of incentive compensation. Other types of options exist in many financial contracts, for example real estate options are often used to assemble large parcels of land, and prepayment options are usually included in mortgage loans. However, many of the valuation and risk management principles apply across all financial options. Long Call A trader who believes that a stock's price will increase might buy the right to purchase the stock (a call option) rather than just buy the stock. He would have no obligation to buy the stock, only the right to do so until the expiration date. If the stock price at expiration is above the exercise price by more than the premium paid, he will profit. If the stock price at expiration is lower than the exercise price, he will let the call contract expire worthless, and only lose the amount of the premium. A trader might buy the option instead of shares, because for the same amount of money, he can obtain a much larger number of options than shares. If the stock rises, he will thus realize a larger gain than if he had purchased shares. Long Put A trader who believes that a stock's price will decrease can buy the right to sell the stock at a fixed price (a put option). He will be under no obligation to sell the stock, but has the right to do so until the expiration date. If the stock price at expiration is below the exercise price by more than the premium paid, he will profit. If the stock price at expiration is above the exercise price, he will let the put contract expire worthless and only lose the premium paid. Short Call A trader who believes that a stock price will decrease, can sell the stock short or instead sell, or "write," a call. Because both strategies expose the investor to unlimited losses, they are generally considered inappropriate for most investors. The trader selling a call has an obligation to sell the stock to the call buyer at the buyer's option. If the stock price decreases, the short call position will make a profit in the amount of the premium. If the stock price increases over the exercise price by more than the amount of the premium, the short will lose money, with the potential loss unlimited. Short Put A trader who believes that a stock price will increase can buy the stock or instead sell a put. The trader selling a put has an obligation to buy the stock from the put buyer at the put buyer's option. If the stock price at expiration is above the exercise price, the short put position will make a profit in the amount of the premium. If the stock price at expiration is below the exercise price by more than the amount of the premium, the trader will lose money, with the potential loss being up to the full value of the stock. From Wikipedia, the free encyclopedia: See full article.
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05-02-2008, 01:05 PM
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Sorry off topic but before continue...
Isn't the GNU Free Documentation License (GFDL) amazing.  Supporting GNU makes us a better person. Every of us who knew Richard Stallman have experimented changes after understand the philosophy behind "freedom as free". You may want to think twice about about keep using proprietary software and gift your money to all scammers hidden behind copyrights.
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Last edited by Linuxser : 05-02-2008 at 01:13 PM.
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05-02-2008, 01:18 PM
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Strike price
In options, the strike price, or exercise price, is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price (market price) of the underlying instrument at that time.
Definition - The fixed price at which the owner of an option can purchase, in the case of a call, or sell, in the case of a put, the underlying security or commodity. Expiration For an option contract, expiration is the date on which the contract expires. The option holder must elect to exercise the option or allow it to expire worthless. Typically, option contracts expire according to a pre-determined calendar. For instance, for U.S. exchange-listed equity option contracts, the expiration date is always on the Saturday that follows the third Friday of the month, unless that Friday is a market holiday, in which case the expiration is on the Friday. In the case where the option is not exercised, upon expiration any margin charged by the clearing firm to the holder or writer of the option is released. The margin may then be used for any purpose, for instance to finance subsequent option trades. Open interest (also known as open contracts or open commitments) denotes the total number of derivative contracts, like futures and options, that are currently active on:
Open interest normally serves as an indicator about a security but it can also be used with other instruments like a currency. From Wikipedia, the free encyclopedia: [1] [2] [3]
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05-02-2008, 02:00 PM
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Feel free to ask what you want about options. I've studied about and worked with during 90's.
For ttt123: Maybe you could find something interesting with FXstreet reports. If your broker works with option I'm pretty sure he will send you best offers and you could the strike price. But I'm in doubt you could get something for free. As I said best choice is reuters. Otherwise a broker with a real options platfrom will send you the available offers. I've just discovered https://www.pfgforex.com/ (Woodies broker) is offering options trade. See picture and see your searched strike price.
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05-03-2008, 12:50 AM
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Option style
In finance, the style or family of an option is a general term denoting the class into which the option falls, usually defined by the dates on which the option may be exercised. The vast majority of options are either European or American (style) options. These options - as well as others where the payoff is calculated similarly - are referred to as "vanilla options". Options where the payoff is calculated differently are categorized as "exotic options". Exotic options can pose challenging problems in valuation and hedging. American and European options The key difference between American and European options relates to when the options can be exercised:
Max [ (S – K), 0 ], for a call optionMax [ (K – S), 0 ], for a put option: (Where K is the Strike price and S is the spot price of the underlying asset) Option contracts traded on futures exchanges are mainly American-style, whereas those traded over-the-counter are mainly European. Difference in value European options are typically valued using the Black-Scholes or Black model formula. This is a simple equation with a closed-form solution that has become standard in the financial community. There are no general formulae for American options, but a choice of models to approximate the price are available (for example Whaley, binomial options model, and others - there is no consensus on which is preferable). Recently, a semi-closed exact formula for the price of American puts has been published by Song-Ping Zhu. There is some debate over whether this formula is a tractable analytic solution or whether it defines the basis for a genre of numerical methods of solving the problem. American options are rarely exercised early. This is because any option has a non-negative time value and is usually worth more unexercised. Owners who wish to realise the full value of their option will mostly prefer to sell it on, rather than exercise it immediately, sacrificing the time value.[1] Where an American and a European option are otherwise identical (having the same strike price, etc.), the American option will be worth at least as much as the European (which it entails). If it is worth more, then the difference is a guide to the likelihood of early exercise. In practice, one can calculate the Black-Scholes price of a European option that is equivalent to the American option (except for the exercise dates of course). The difference between the two prices can then be used to calibrate the more complex American option model. To account for the American's higher value there must be some situations in which it is optimal to exercise the American option before the expiration date. This can arise in several ways, such as:
There are other, more unusual exercise styles in which the pay-off value remains the same as a standard option (as in the classic American and European options above) but where early exercise occurs differently:
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