OPTIONS FOR FOREX

Many people do not know about Options for Forex Exchange. But they are here, alive and kicking! And for that, we really have to find a way to use them, like we use in our Covered Call trades. These are for Hedging purposes. The great thing about Forex is that currencies TREND VERY WELL, and this means that we mitigate one of the problematic issues with Buying Options, which is Time Decay. The Options for Forex which really piqued my interest are the options for the Canadian Dollar (CDD), Japanese Yen (YUK), and Euro (EUI). The options offer a great way of setting a hedge against a position (without the use of hard Stop Losses, although you might want to use Mental Stops).

For example, on Friday we saw the DOW turning down 367 points. Since this represents the risk aversion (money flowing out of stocks to bonds, for example), the USDJPY should go down. But let’s say that we want to protect our position SHORT position since the market has been going up today on Monday 22nd October,but for now, we do not know if this is the real thing or merely a "dead cat" bounce. We have also done our homework and realise that analysts at Daily FX are targeting 111.59 as a target, so we cautiously set 112.00 as our target.

We would then short the USDJPY at 114.13 and purchase a Call option on YUK at 114.50 (expiring on the third Friday of November) at $1. What we have now is effectively a short USDJPY position with a “Stop Loss” of 137 pips. Let's see how this develops and whether indeed our target of 112.00 on the spot will be met.

P/S-I'm currently using Options to play a possible rally on the USDCAD pair. I bought the Nov 98.5 at $0.65, and until now, it hasn't cleared this level after 1.5 weeks. That's the beauty of options, because I would be in deep trouble if I did this using the Spot Forex. This is a speculative position that should yield a quick profit once the USDCAD pair "pops" to the upside, giving us a profit and IV (Implied Volatility) rises. The presence of IVs on Forex Options make them more easier to trade than Stock options, which are susceptible to gap ups and downs.

Chief Shook