First are you doing FOREX options or currency futures options? I'm futures-oriented. IN terms of the number of strikes, on EUR and GPB there are enough with decent volume. Not so sure about the JPY and CHF. These are the main four I trade with Globex/CME. In comparison, ZN (bond futures) options annoyme, as there are so few strikes to chose from.
Options writers and currency futures
- Thread starter nravo
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First are you doing FOREX options or currency futures options? I'm futures-oriented. IN terms of the number of strikes, on EUR and GPB there are enough with decent volume. Not so sure about the JPY and CHF. These are the main four I trade with Globex/CME. In comparison, ZN (bond futures) options annoyme, as there are so few strikes to chose from.
So if you added a short Apr put/long May put would that make it a quadruple diagonal?
yes you're correct but those FX options doesn't have a favorable bid ask spread to accommodate such a high frequency trading, meaning that any of your adjustments would have a huge burden to overcome. In addition, FX pairs are subject to outlier in both ends of distribution, while stock index FOPs only have outlier risk on the downside. This limits one's strategies risk wise. That is why most CTA and hedge funds that are premium sellers, only sell OTM call premium on the indexes. Their risk is perfectly described by the normal distribution.
as far as FOPs is concerned, both GLOBEX and EUREX have done a good job, assuring the main indexes have very liquid FOPs that can be traded at FMV. I dont think the FX or commodities have such a market as far as FOPs is concerned.
I thought most of these guys wrote index puts ala VN. Thus the occasional blowout in a downdraft.
To be fair, only 30% of LTCM's debts were in short options, and it wasn't the largest category. (Not that they didn't blowout spectacularly, but pointing to vol selling as being THE cause is not correct).
Good post although those who were short calls going into the Oct/98 and 1/3/01 surprise Fed eases (neither occurred during previously scheduled Fed meetings) would disagree about outlier index events being only to the downside!
in my opinion those events fall into the normal distribution perfectly well. Maybe the upside move went through 1 std deviation up to 2 or even 3 std devs which is perfectly described by the bell curve. They would take a loss on their call inventory, but within the limits of their expectations, as most professional call sellers, use strikes in the range of 1.5 up to 2.5 std deviations OTM. under this approach, an outlier would be an upside move of 4 or more standard deviations. That would be a catastrophic event for those options sellers. To illustrate this, imagine the S&P moving up 300 points in less than one month, that would be +4 std devs.
There's still good money to be made in CME currency options. Volatility had drained and cut into our premiums for writing. Careful implementation of risk reversals on days when the market spikes one way or the other still pays.
The introduction of FXMS is going to be huge and will add volatility, particularly in the early months. There's going to be a lot of hacking around.
Folks will be arbing between Hotspot (if HS lets em trade), FXMS and EBS.
Watch for the volume in NYBOT currency futures to take of as well. ICE is making plans to add NYBOT currency futures to their playform.
The introduction of FXMS is going to be huge and will add volatility, particularly in the early months. There's going to be a lot of hacking around.
Folks will be arbing between Hotspot (if HS lets em trade), FXMS and EBS.
Watch for the volume in NYBOT currency futures to take of as well. ICE is making plans to add NYBOT currency futures to their playform.