FX options – Basic Strategies
Agenda
• Intro – why option strategies? • Pay-out profile & the four base positions • Basic directional strategies • Basic non-directional strategies • Basic hedging-strategies
why option strategies?
Agenda
• Intro • Pay-out profile & the four basic positions • Basic directional strategies • Basic non-directional strategies • Basic hedging-strategies
Pay-out profile:
Price of the underlying at expiry, in this example EURUSD Profit Loss
1,51 1,52 1,53 1,54 1,55 1,56 1,57 1,58
Profit or loss of the strategy at expiry of the option(s)
4 basic positions – “the building blocks” Long call
Profit Loss
Short call
Profit Loss
Long put
Profit Loss
Short put
Profit Loss
9. Protective Call Scenario: You have a Short position in the spot. You believe that the market will move in favor of your position in the long term, but you are concerned that there will be a large correction over the next few weeks. You want to protect your position against the potential correction, but still maintain your open spot position.
Strategy #9: Protective call
- You are already short - You buy an OTM call to protect your short spot, if the market rises
9. Protective Call Original position: short EURUSD
Profit Loss
Lower profits Fear: EURUSD compared willto the original increase position in the short term Lower risk compared to the original position A
Bought call with strike “A” New position until expiry of bought call: a ”synthetic” put
9. Protective Call - conclusion: Advantages to the strategy: • The payment of a premium insures you against temporary, adverse movements in the market
Downside to the strategy: • The option proves to be unnecessary if the market never rallies as you feared
10. Protective Put Scenario: You have a long position in the spot. You believe that the market will move in favor of your position in the long term, but you are concerned that there will be a large correction over the next few weeks. You want to protect your position against the correction but still maintain your open spot position.
Strategy #10: Protective put
- You are already long - You buy an OTM put
10. Protective Put Original position: Long EURUSD Bought put with strike ”A” New position: ”synthetic call”
Profit Loss
A Fear: EURUSD falls short term
10. Protective Put - conclusion: Advantages to the strategy: • The payment of a premium insures you against temporary, adverse movements in the market
Downside to the strategy: • The option might prove to be unnecessary if the market never falls like you feared
11. Collar on a long position Scenario: You have a long position in the spot. You believe that the market will move in favor of your position in the long term, but you are concerned that there will be a large correction over the next period of time. You want to protect your position against the correction and, at the same time, reduce the cost of the hedge.
Strategy #11: Collar on a long position
- You are already long of the underlying - You sell a call with a higher strike (and receive a premium) - You use the received premium to buy a “protective put� at a lower strike
11. Collar on a long positions Original position: Long EURUSD Sold New call position: with strike Bull spread ”B” Bought PUT with strike ”A”
Profit Loss
A B
11. Collar on a long positions - conclusion Advantages to the strategy: • The premium received from the sale of the OTM call finances (entirely or in part) the bought put • You know exactly what your maximum profit or loss is.
Downside to the strategy: • You miss out on profits that you would have made on a stronger-than-expected rally
12. Collar on a short position Scenario: You have a short position in the spot. You believe that the market will move in favor of your position in the long term, but you are concerned that there will be a large correction over the next period of time. You want to protect your position against the correction while at the same time limit the cost of the hedge.
Strategy #12: - You are already short Collar on a short position - You sell an OTM put
- You use the premium that you receive to buy a “protective call�
12. Collar on a short position Original position: short EURUSD New Sold put position: with strike bear spread ”A” Bought call with strike ”B”
Profit Loss
A
B
12. Collar on a short position - conclusion Advantages to the strategy: • The premium received from the sale of the OTM put finances (entirely or in part) the bought call • You know exactly what your maximum profit or loss is.
Downside to the strategy: • You miss out on profits that you would have made on a stronger-than-expected fall in the market
Agenda
• Intro • Pay out profile & the four base positions • Basic directional strategies • Basic non-directional strategies • Basic hedging-strategies