Options are contracts that give the buyer the right to buy or sell an asset at a pre-specified time and price. In return, the seller receives a fee for writing the contract which is termed a premium.
A put option is one in which the terms of the contract grant the right to sell the underlying, and a call option is one where the right to buy is granted. Here we invite the trader to regard the currency options market as a closed box, and to concern himself merely with the aspects that we will utilize to predict the movements of spot.
The trading strategies we will discuss are simple and easy to use, and depend on the exploitation of implied volatility for long term trades and expiration data for short term use. To utilize these methods we only need to understand a few simple concepts.
See a more thorough explanation of currency options here. Data on open currency options contracts that are close to expiry is regularly provided by IFR and the information can be acquired by registering with brokers that offer the service.
Most major forex brokers will offer at least one financial news provider on their platform or website, and the news flow provided by open interest on CBOE options is also available from COT reports which the trader can use to form an opinion on trader positioning, and therefore the potential impact of the option on the market. One of the easiest and most successful ways of trading the spot currency market is through the use of option expiry data. Options contracts are typically for sums of anywhere between million to million USD, and values beyond the range are not uncommon.
Since these are relatively large sums to be concentrated in a few minutes before the expiration, the traders of these options will do all that they can, within reasonable limits, to move the quote to the strike price of the option, provided that the quote is within about pips of the strike price at the time of expiry. One important point that the forex trader can keep in mind is the distinction between the European style, and American style options.
Since European style options can only be exercised at their expiration date, they are likely to be defended more vigorously if the quotes happen to be close to the strike price. In addition, at the beginning the trader is advised to utilize non-exotic expiries so called, vanilla put or call options for the strategy, as he betters his skills by examining contract types and similar details provided by the news providers.
As usual, there is no need to trade every option expiry that is reported. One can simply begin with smaller sums to test his knowledge, and then increase the size and scope of his trades as he gains experience. But even without the realization of these conditions sizable profits can be made with this method in a calm and unexcited market. If the price quote is close to the strike price of the option, option traders and other market participants will attempt to steer the quote in direction they desire.
A strong sign that the option traders will defend their position is the early gravitation of the price quote to the strike price. After that, as the price reacts to the news, the quote may move away from the strike price in an unwanted. To successfully profit from this pattern the trader would need to join the option traders as they try to move the quote back to the strike value, and since a lot of people play this game the odds of success are quiet high.
As long as option expiries are proclaimed by news providers, and as long as large expiries tempt option traders to risk relatively small sums to ensure that they receive their payouts, this method will keep paying dividends. An important point that we should keep in mind is the momentum created by option expiries. As option traders buy or sell, their actions will be joined by all sorts of other traders and snowballing effect creates its own power as a mini-bubble is generated.
Needless to day, right after the option expiry occurs, the strike price will be just another number on the charts, and will lose all its significance.
Ready to start trading with this strategy? Find our top selection of forex brokers here. Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors.
The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you. This is the price at which the option will grant a payout, in other words, it will register a profit for the option buyer, depending on the kind of option contract. This is the date at which the contract is settled, and payments are made.
This is perhaps the most important data for trading spot forex. The payout that the option contract stipulates. How to use currency option expiration data to trade the spot market? The difference between European and American options explained One important point that the forex trader can keep in mind is the distinction between the European style, and American style options. Ideal conditions for trading option expiry The ideal conditions for this method are: Option expiry is at 10 am EST.
Option size is greater than million USD. The quote is at the strike price before the news release at 8: What happens during an option expiry? Was this article helpful?More...