Help Executing a CAD/USD Option Trade (Need Trading Guru!)

[DPatty16]

Hi All,

I ultimately want to "bet" on the thesis that the Canadian dollar will decline in value relative to the US dollar. I would like to do this with options so that it's a bit of money up-front, but at least I know that the "worst case scenario" is I just lose all that money (the option premium).

Where I need the forum's help is in how to craft the trade such that I ideally:
1) Deal only in Canadian dollars
2) When the position is in-the-money, rather then having to deliver a large amount of money to exercise the option I can isntead purchase wahtever offsetting contract is required (ie. another option? Or some sort of forward contract?) such that essentially my profits are received in CAD dollars.

To help me understand fully how such a trade would work, can someone please flesh out an example of the steps involved for a situation where:
1) Let's assume that the current spot FX rate is C$1.35 = US$1.00 and that in 10 months time it will be C$1.50 = US$1.00
2) You use a 12 month (1 year) option with a C$1.40 strike price that you end up exercising in 10 months (ie. 2 months early)?

Thanks!

 

[bookish]

You would be better off doing the futures contract and hedging with far OTM options. You can get the same result a lot cheaper and have better odds of making money and still being protected. Also you can run the trade for a longer period of time. The exception might be if you are confident this event will take place in a narrow time window. Another possibility would be to sell the short side of the options, cover with one a little further out of the money. After you have seen the other replies let us know what you decide to do and how it works out.