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WHS FX Options Guide Getting started with FX options WHS FX options guide Predict the trend in currency markets or hedge your positions with FX options. Refine your trading style and your market outlook. Learn how FX options work on the WHS trading environment. WH SELFINVEST Copyrigh 2007-2011: all rights attached to this guide are the sole property of WH SelfInvest S.A. Reproduction and/or transmission of this guide Est. 1998 by whatever means is not allowed without the explicit permission of WH SelfInvest. Disclaimer: this guide is purely informational in nature and can Luxemburg, France, Belgium, in no way be construed as a suggestion or proposal to invest in the financial instruments mentioned. Persons who do decide to invest in these Poland, Germany, Netherlands financial instruments acknowledge they do so solely based on their own decission and risks. Alle information contained in this guide comes from sources considered reliable. The accuracy of the information, however, is not guaranteed. Table of Content Global overview on FX Options Different strategies using FX Options Single Vanilla Vertical Strangle Straddle Risk Reversal Trading FX Options in WHSProStation Strategy settings Rules and Disclaimers FAQ Global overview on FX Options An FX option is a contract between a buyer and a seller for the What is an FX option? right to buy or sell an underlying currency pair at a specific price on a particular date. EUR/USD -10 Option Premium Option resulting in a short position 1.3500 - 1.3400 +100 PUT Strike Price – Current Market Price Overal trade Strike price +90 You believe EUR/USD will drop in the weeks to come. FX options allow you to trade this scenario by buying the right to sell at a certain price level or so called strike price. This right is called a PUT option. The price to obtain this right is called the premium. 1 Global overview on FX Options Evolution of profit/loss after BUYING a Call or a Put Evolution of profit/loss after SELLING a Call or a Put CALL CALL Loss Loss Profit & Profit & Profit Exchange Rate Exchange Rate PUT PUT Loss Loss Profit & Profit & Profit Exchange Rate Exchange Rate 2 Different strategies using FX Options Choosing your strategy in the order window On top in the order window you can choose the strategy you would like to trade. Possibilities are: Single Vanilla Vertical Strangle Straddle Risk Reversal On the next pages, each strategy will be explained in more detail. 3 Different strategies using FX Options BUYING a CALL option SELLING a CALL option Single vanilla The trader options anticipates The trader that the price anticipates that It’s a one-side only CALL or of a currency the price of a PUT position. pair will rise currency pair will Either you fall. They will sell BUY the right and you pay and wants to the premium Loss take Loss the call and or you SELL the right and advantage of collect the collect the premium. that premium. movement. The profit is When you buy, the risk is limited to the premium Profit & Profit The profit is & Profit limited to the premium you have paid initially. unlimited When you sell, the risk is received while while the loss Exchange Rate Exchange Rate potentially unlimited if you is limited to the loss is don’t hold the underlying the price of unlimited. in your account. the premium. This strategy is also BUYING a PUT option SELLING a PUT option referred to as a ‘directional’ trade, The trader because you can only anticipates The trader benefit from it when the anticipates that market trends in one that the price direction. of a currency the price of a pair will fall currency pair will and wants to rise. They will take sell the put and Loss advantage of Loss collect the that premium. movement. The profit is limited to the The profit is & Profit Profit & Profit unlimited premium while the loss received while is limited to Exchange Rate the loss is Exchange Rate the price of unlimited. the premium. 4 Different strategies using FX Options Strategy General Structure Use Risk/Reward Evolution This is a two-side or ‘legs’ BULL SPREAD: Buy low strike Moderately bullish Loss limited to the premium strategy on the same and sell high strike. Same paid. Profit is capped at the currency pair. expiration and quantity. number of pips between A simultaneous buy and sell strikes minus pips paid. Vertical of two different strike prices BEAR SPREAD: Sell low Moderately bearish Loss limited to the number is referred to as a spread. strike and buy high strike. of pips between strikes Vertical means that the Directional trade with less minus pips received. Profit is spread is build using options Same expiration and exposure to volatility than a capped at the premium with the same expirations. quantity. plain vanilla structure. collected. With a straddle, you buy both BUY at the money CALL, Neutral Loss is limited to the a call and a put on the same BUY at the money PUT premium paid and profits are underlying currency pair with potentially unlimited. the same strike price and SELL at the money CALL, Neutral Loss is potentially unlimited Straddle expiry. SELL at the money PUT while profits are capped at the premium collected. Same strike, quantity and Stable market expected Generate income in flat expiration. market, volatility expected to decrease. A strangle has a similar set BUY out the money CALL, Neutral Loss is limited to the up to a straddle: you open BUY out the money PUT premium paid and profits are both a call and a put on the potentially unlimited. same currency pair. These SELL out the money CALL, Neutral Loss is potentially unlimited Strangle must both be going either SELL out the money PUT while profits are capped at long (a long strangle) or short the premium collected. (a short strangle), and have Similar Delta, same quantity Stable market expected Generate income in flat the same expiry. With a and expiration. market, volatility is expected strangle, however, your put to decrease. has a lower strike price than the call. BUY CALL, SELL PUT of the Bullish Similar as a net LONG A risk reversal is a strategy same quantity and expiration Synthetic Long position when position, depending on the often used to protect a long for any strike. strikes are equal. strikes. or short currency pair Risk position, but it can also be SELL CALL, BUY PUT of the Bearish Similar as a net SHORT Reversal used to speculate on market same quantity and expiration Synthetic Short position position, depending on the volatility. for any strike. when strikes are equal. strikes. Hedging purposes Call/Put volatility skew. 5 Trading FX Options in WHS ProStation When WHS Prostation is open, you can start trading options by clicking the VIEW menu and selecting the OPTION BOARD. This displays the FX OPTIONS QUOTE BOARD which displays a number of strike prices and expiration dates for the selected currency pair. You can select a currency pair from the UNDERLYING MARKET drop-down menu. Once selected, you can see the current market price for that currency pair in the UNDERLYING bar. Below that, you can view a list of expiry dates for that currency pair. You can use the STRIKES field to increase or reduce the number of strikes you see. To see all available strikes, click the SHOW ALL checkbox. You can view the option chain for that expiry by clicking next to the expiration date you want. The chain displays several strike prices, the implied volatility and Delta for a particular strike, and the bid and ask prices for call or put options for each strike. 6 Trading FX Options in WHS ProStation You can also click FILTER EXPIRY DATES to open the Option Board Filter. In this window, you can click on one of the tabs to narrow down the options by expiry date or strike price. You can customize the appearance of the FX Option Quote Board by right- clicking on it and selecting CONFIGURE… from the drop-down menu. You can then use the Configure Option Quote Board window to display additional columns in the Underlying Markets row or Option Board, change the colors or font styles or select the pricing convention you want to see in the window. 7 Trading FX Options in WHS ProStation You can also select one of the available option order strategies (VERTICAL, STRADDLE, STRANGLE, RISK REVERSAL or SINGLE VANILLA) from the ORDER drop-down menu. In the Option Strategy section, you can select the account you want, the If you want to place one of the currency pair, the order type and available option order strategies whether the option order is a buy or quickly, you can also right-click sell. The system will automatically set on a Bid or Ask price under the the premium. You can set you own Call or Put section and select price for Stop and Limit orders in the VERTICAL, STRADDLE, ORDER PRICE field. STRANGLE, RISK REVERSAL or SINGLE VANILLA. This opens the New Order window with the strategy set up. Double-clicking on a BID or ASK price under the Call or Put section opens the NEW ORDER window so you can place a single-vanilla option order at the current market price. 8 Strategy settings The DURATION tab displays how long The TERMS tab The ANALYSIS tab summarizes the When done, click SUBMIT to your order will be working. All option displays the lot size, cost, the maximum profit and loss place your option order.
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