It is a glorified casino bet, pure and simple. There are various quant book descriptions, but since the outcome is either-or, and since the currency market is the playing ground for major institutions, binary options for retail investors are no better than throwing dice. Another analogy: small boats just gets pushed aside by waves following tankers who sail with little regard of the course charted by little boats' technical analysis.
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Bear Call spreads
- Thread starter ecasene
- Start date
It is a glorified casino bet, pure and simple. There are various quant book descriptions, but since the outcome is either-or, and since the currency market is the playing ground for major institutions, binary options for retail investors are no better than throwing dice. Another analogy: small boats just gets pushed aside by waves following tankers who sail with little regard of the course charted by little boats' technical analysis.
Quote from Neutral:
Thanks for the explanation. I wasn't concerned about the definition of bear call spread though. I was just wondering if it is necessarily true that, if a strategy is terrible over the long run, then does it follow that taking the other side of such a strategy is a good idea? It seems to me, as a novice, it must be unless the middle-man is taking all the meat. I would like to know if this line of thinking is naive. I am curious both about the specific spread mentioned in the thread, as well as a general idea.
If you ask me the "middle man must be taking all the meat"
The otherside of the trade if you ask me is overpriced, and the value of the options seem to decay way too quickly. So if you take a position and do not time it absolutely perfect, from my experience not only will you not break even or close to it, you will lose money.
I'm not positive, but I believe a long option using just 1/10 lot size (10,000) ATM cost's a couple thousand to place with most currencies. ITM strikes are just plain rediculous for the amount of capital you need to go long with 1/10 a lot. You have no ability to place smaller scale trades anywhere near the current price, and the return for OTM strikes just don't seem to add up to the premium + rate of decay.
I'm only talking for 1 month options above... if you go beyond that into 2, 3, 4 month options the capital needed for just OTM options that seem legitimate is way too much for an average trader.
FX options to me seem rigged, plain and simple. I would not doubt that they are either because FX has a horrible reputation for brokers working against you.
That's not to say you cannot make money doing so, but I would imagine if an FX trader actually knew what they were doing to begin with they would trade standard FX. Unless they have such a high rate of success that it's not funny.
Quote from Neutral:
Thinking a bit more, perhaps Insurinator meant that no money can be made AND lost. In other words maybe FX options market is too efficient to reliably make (or lose) money with sensible strategies that work elsewhere. I assume that in a perfectly efficient options market nobody but the market maker and the broker can earn money from options.
what you are missing is that to sell premium you sell naked. i do fx options all the time (eur and cad). though to do naked you need to use portfolio margin. otherwise the returns are not great.
You can still sell premium with spreads, can't you? If it's a credit spread, you just sold some net premium, right? So, if selling premium is "bad", it must follow thatQuote from christianhgross:
what you are missing is that to sell premium you sell naked. i do fx options all the time (eur and cad). though to do naked you need to use portfolio margin. otherwise the returns are not great.
1. Buying premium is good
or
2. Neither is good. All you do on average is pay the broker and the market maker for their services.
My question is, are there other possibilities?
Quote from Neutral:
You can still sell premium with spreads, can't you? If it's a credit spread, you just sold some net premium, right? So, if selling premium is "bad", it must follow that
1. Buying premium is good
or
2. Neither is good. All you do on average is pay the broker and the market maker for their services.
My question is, are there other possibilities?
I think you are missing my point. The problem with FX options, and many of the commodities is that the bid ask spread tends to be very big and the skew of the bid and ask is quite high.
So if you sell or buy whatever you are underperforming since the bid ask spread is making you buy or sell to high or low. The reason has to do with the fact that commodities, and fx options need to be sold as naked positions.
With SPX, and NDX the margin requirements even with portfolio margin on naked positions is quite high. Whereas with commodities, fx the margin requirements are directly related to the risk of the position.
I tend to prefer commodities, and fx because it allows me to sell crazy positions with relatively low risk and low margin requirements.
Quote from christianhgross:
I think you are missing my point. The problem with FX options, and many of the commodities is that the bid ask spread tends to be very big and the skew of the bid and ask is quite high. So if you sell or buy whatever you are underperforming since the bid ask spread is making you buy or sell to high or low.
So, doesn't this agree with the possibility #2, which said "2. Neither is good. All you do on average is pay the broker and the market maker for their services."?
As opposed to being sold as spreads?The reason has to do with the fact that commodities, and fx options need to be sold as naked positions.
Now I am confused a bit. Are you saying FX spreads are not feasible because they have wide bid-ask spreads and have to be built from technically naked options, leading to high margin requirements, whereas if you do intend to sell crazy naked FX and commodity options, it's good because the margin requirement for one option is small (but not small enough to make the combination of naked options to make a spread margin-efficient)?With SPX, and NDX the margin requirements even with portfolio margin on naked positions is quite high. Whereas with commodities, fx the margin requirements are directly related to the risk of the position. I tend to prefer commodities, and fx because it allows me to sell crazy positions with relatively low risk and low margin requirements.
Quote from Neutral:
Now I am confused a bit. Are you saying FX spreads are not feasible because they have wide bid-ask spreads and have to be built from technically naked options, leading to high margin requirements, whereas if you do intend to sell crazy naked FX and commodity options, it's good because the margin requirement for one option is small (but not small enough to make the combination of naked options to make a spread margin-efficient)? [/B]
Yes I am saying FX options sold as spreads are hard to do because they have wide bid-ask spreads.
BUT, and this where I am guessing you don't have portfolio margin. If you sell a naked FX or commodity position then the initial margin can usually make about 10% return, with about 15% maintenance. However, if the position moves against you the requirements move up quickly, though only the maintenance.
My question is do you have more than 125K in the account, and if not then forget about trying to play naked option positions. The margin requirements will make any play nearly impossible.
Right now what is almost impossible to play is GC. The bid ask spreads are horrible, and the naked portfolio margin is out of whack. The simplest way to play is GLD, but then I need to literally sell hundreds of spreads to make any kind of money.
That's a reasonable but incorrect guess. However, I currently have no intention of playing FX options. My goal was to understand the thinking and the facts when a certain assessment (which happened to be on FX options) was made. But the specific info about FX options were certainly useful. Thanks to all for conveying their experiences and perspectives.Quote from christianhgross:
BUT, and this where I am guessing you don't have portfolio margin.
.
.
My question is do you have more than 125K in the account, and if not ...
A bit discouraging. Can I re-state the original post, for long directional plays either cash or long/short option spreads that cost you premium up front which of cash or options is the best or worst?
It sounds like options is worse if i'm reading you right, because of bid-ask spreads being 'asymmetric' about the market mid, leaning towards the brokers favour? and also they aren't priced with a traditional option pricing model (eg black) but also have a big wodge added on to make it an even worse deal for you?
Would the latter favour writing spreads? but as fx is supposed to be so volatile isn't that just a bit risky? 1 month was mentioned, I heard two months is when theta decay starts to rev up. Is this true or is it just one month and are you saying two months out options just cost too much(?!)
It sounds like options is worse if i'm reading you right, because of bid-ask spreads being 'asymmetric' about the market mid, leaning towards the brokers favour? and also they aren't priced with a traditional option pricing model (eg black) but also have a big wodge added on to make it an even worse deal for you?
Would the latter favour writing spreads? but as fx is supposed to be so volatile isn't that just a bit risky? 1 month was mentioned, I heard two months is when theta decay starts to rev up. Is this true or is it just one month and are you saying two months out options just cost too much(?!)