Forex Options to capture swap

S

scattergood

Hi all,

I am new to the world of options trading, as I have been trading forex for the past 3 years. However, to smooth out the risk / reward curve that I have been facing over the most recent past I started looking at options. I have been investigating a strategy aimed at capturing the swap or overnight interest of a currency pair by using protective stops. I'd do this at Saxo or Ikon where I can be trading options as well as the spot in the same account.

Buy 100,000 GBPUSD at 1.7840
Sell the 16-Dec-08 1.7900 Call @ .0303 (Credit $3030)
Buy the 21-Oct-08 1.7800 Put @ .0300 (Debit $3000)

This gives me 49 days of swap to collect, or about $563 total at 11.50 a day before the Oct Put expires.

It seems there are 3 outcomes:

1) If the currency falls dramatically to say 1.7000 then I lose .0040 on the Spot / Put strike difference, but make it up with the Swap / Call depreciation.

2) If the Currency rises dramatically say to 1.8800 then I make the .0060 on the Spot / Call difference plus the swap, less the time decay on the call.

3) If the currency stays the same, then I keep the swap and the time decay on the call.

So as long as IV on the call doesn't increase significantly I should be at break even to up on the position.

Below is a graph created in OptionsOracle on the XDB, the PHLX tracker of the GBPSD, so it doesn't reflect the 49 days of swap, which seems to bear out my thinking.

I just was hoping that smarter people than I could tell me where I may be wrong in my thinking on this kind of position, any help is greatly appreciated. Thanks!
 
Quote from scattergood:

Hi all,

I am new to the world of options trading, as I have been trading forex for the past 3 years. However, to smooth out the risk / reward curve that I have been facing over the most recent past I started looking at options. I have been investigating a strategy aimed at capturing the swap or overnight interest of a currency pair by using protective stops. I'd do this at Saxo or Ikon where I can be trading options as well as the spot in the same account.

Buy 100,000 GBPUSD at 1.7840
Sell the 16-Dec-08 1.7900 Call @ .0303 (Credit $3030)
Buy the 21-Oct-08 1.7800 Put @ .0300 (Debit $3000)

This gives me 49 days of swap to collect, or about $563 total at 11.50 a day before the Oct Put expires.

It seems there are 3 outcomes:

1) If the currency falls dramatically to say 1.7000 then I lose .0040 on the Spot / Put strike difference, but make it up with the Swap / Call depreciation.

2) If the Currency rises dramatically say to 1.8800 then I make the .0060 on the Spot / Call difference plus the swap, less the time decay on the call.

3) If the currency stays the same, then I keep the swap and the time decay on the call.

So as long as IV on the call doesn't increase significantly I should be at break even to up on the position.

Below is a graph created in OptionsOracle on the XDB, the PHLX tracker of the GBPSD, so it doesn't reflect the 49 days of swap, which seems to bear out my thinking.

I just was hoping that smarter people than I could tell me where I may be wrong in my thinking on this kind of position, any help is greatly appreciated. Thanks!
More...

Basically after your put expired you have leftover position which is a covered short call which synthetically is the same as having a short put.......Clearly no one knows right now how a short put situation would workout for you, and you were right, depending on IV you may be able to flatten tour position cheaper compared to what you have gained and thus making money, but could well be that you have to invest more to flatten your position then what you have earned.

As always, no free lunch here. Trading options through the brokers you mention you can bet they add a hefty spread and making any arbitrage impossible.
 
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