Currency Box Options

Quote from MidKnight:

Thanks for the reply atticus - some of it makes sense! :)

I'll play along and post some ideas I have next week with regards to NT plays on the 13 pairs in my world. These will be just straight NT plays for the duration of the week.

At the very least, I might learn something from this exercise.

Kind regards,
MK
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Looking forward to it. The only positive input I receive is from my bank asking me to increase size. I suppose it's not altruism at-play. They've stopped asking for more size after my recent string of wins.
 
Oanda offers options on the following crosses:

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Hey atticus,

I was thinking more about the CHF/JPY trade that you posted. I understand it! At least, I can visualize what the risk graph is like. Brilliant. I wouldn't have thought of that using these products - thanks for sharing the idea.

My interest in these products is in short-term directional spec, but also to figure out some way to use them instead of using stops when I'm trying to position for big moves with the spot. First obvious way to do this that comes to mind is simply using a hit. The r/r seems to typically be over 2:1 for a box 100 pips out lasting about 1 week. Of course, the real risk then is that it doesn't make the hit which incurs a bigger lose then if one had just used a stop at 100 pips below the market. My gut says my thinking here is too simplistic and there is some more sophisticated way to do it. I'm exploring - it is fun. Feels good.

Looks like your USD/JPY NT will be good - nice job!

Best regards,
MK
 
When you say the CHF/JPY spot hedge is a weak hedge, you are meaning that they are not ratioed evenly - something other then a 1:1, right?

How do you decide when to say uncle to the downside?

How do you decide how to set the ratio? Being into the numbers like you are, I guess you decide based on how much delta exposure you want, just a hunch.

MK
 
Quote from MidKnight:

When you say the CHF/JPY spot hedge is a weak hedge, you are meaning that they are not ratioed evenly - something other then a 1:1, right?

How do you decide when to say uncle to the downside?

How do you decide how to set the ratio? Being into the numbers like you are, I guess you decide based on how much delta exposure you want, just a hunch.

MK
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Right, weak refers to barrier risk, net of hedging, that results in a loss. I would sell a CHFJPY call and get flat deltas in spot under a vanilla-scenario. I am flat deltas under static-price, but deltas accumulate massively with only a few pips movement into the direction of the barrier.

I look at the spot-equivalent $delta and get a market.

The swiss-trade is the largest notional risk I've ever traded. I've got a 200 pip downside [price] cushion based upon the current hedging regime, which is 6 sigmas on spot. Obviously I'm pretty bearish on swiss-yen here. I've no plans to hedge it dynamically. I'll turn a +30% year [Feb, 1 inception] into a 10% loss if the barrier is seen.
 
Quote from atticus:

I bought a large-exposure CHF/JPY no-touch today in the OTC market which expires on June 1, NY-cut. 99.10 strike; 70/100 payout; long CHFJPY spot as hedge. The barrier is outside of 2-sigmas for that duration and the spot hedge is weak.

I chose to short d/g in CHF/JPY as my model predicts a contraction in stat vol on the pair. I foresee some spillover from today's selloff in equity markets, hence the long yen/short swiss price exposure.

The closest analog in the vanilla World would be a short synthetic straddle or overwrite.
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referring to the long hedge... how complicated is it to determine the long amount (CHFJPY spot )? if in this particular trade the underlying reverses , do you sell your long before the payout amount is less than the notional loss?
 
Quote from domestic:

referring to the long hedge... how complicated is it to determine the long amount (CHFJPY spot )? if in this particular trade the underlying reverses , do you sell your long before the payout amount is less than the notional loss?
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Not complicated at all. I solve for a break-even result at the barrier and multiply by fractional-moneyness/touch probability. I reduce the hedge further based upon a stat vol or directional bias.

Yes, I always cover spot before it burns the net payout. At which point I've bought touch options within one-sigma to capture some whips into the barrier risk.
 
I tried one of these out on FXGame today. After new york close I opened a NT on USD/JPY 50 pips below price due to expire in 24 hours at 120.80. The r/r on the trade was nearly 1.5:1 - pretty good I thought.

Price came barreling down though and I tried to get fancy by selling some spot. Lost 20% of the payout doing that.

This is really just an exploration exercise for me today. I'll need to develop rules and a play for if hedge and when etc...

This is fun though, great thread.

MK
 
Yen is a proxy for the index markets due to the carry trade and it's impact on global liquidity via synthetic repo. Index markets fall = yen rally. Virtually all of my yen trades are index proxies.

MK -- I show 82 as the low in JPY; are you still in your demo box? I agree, good thread!
 
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