Simple FX option question

N

Nashequilibrium

I have been trading fx spot for the last 4yrs and i realised that i can increase my yearly returns by trading options, so i am running the demo platform at saxobank to make sure that i can use them effectively but i have a silly question.

In the spot market, if i am trading at 100:1 leverage and i buy euro at 1.2100 with $1000,00 in margin, i will make $1000,00 profit excl the spread if it goes up to 1.2200. Now, i would like to get the same payoff structure for fx options with 100:1 leverage. Therefore if i buy an atm call for 100pts, therfore euro would need to get to 1.2200 for me to break even and if i want to make $1000,00 profit it will need to go to 1.2300. So ,my question is, will i earn $10 a point like the spot market when price is moving above my strike, assuming a 100:1 leverage?

I would like to hear from guys who trade fx options on retail platforms.

Thanks guys....
 
Quote from Nashequilibrium:

...Therefore if i buy an atm call for 100pts, therfore euro would need to get to 1.2200 for me to break even and if i want to make $1000,00 profit it will need to go to 1.2300...
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You are assuming you hold the option to expiry. If you don't then the p/l is not that straight-forward as you have to take into account the option's delta (and gamma for more accuracy), changes in IV and days to expiry.

An ATM option will move by about half of the spot move.
 
Yes, i am assuming, i will hold untill expiry. Therefore if i hold till expiry, will my payout be as straight forward as stated above?

I realise that the option has a time value and intrinsic value, therefore by closing before expiry the option should be worth more as it still has some theta value in it.
 
Quote from MTE:

You are assuming you hold the option to expiry. If you don't then the p/l is not that straight-forward as you have to take into account the option's delta (and gamma for more accuracy), changes in IV and days to expiry.

An ATM option will move by about half of the spot move.
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Also, if an ATM option will move by about half of the spot move, would that imply that i should more or less double my trade size to get the return characteristics of a spot position.
 
Quote from Nashequilibrium:

Also, if an ATM option will move by about half of the spot move, would that imply that i should more or less double my trade size to get the return characteristics of a spot position.
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No, that's the mistake most people make. Options provide leverage and you can lose the whole premium paid, so you shouldn't just blindly double up.

Also, yes, the payoff at expiry is as simple as that.
 
Quote from MTE:

No, that's the mistake most people make. Options provide leverage and you can lose the whole premium paid, so you shouldn't just blindly double up.

Also, yes, the payoff at expiry is as simple as that.
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Thanks.........what would you suggest as a way to get my option payout to look more like a spot trading position payout. I understand that delta tells you how closely option follows the underlying spot price, so does that mean the option needs to have a delta of 1 to follow the spot market payoff?
 
Quote from Nashequilibrium:

Thanks.........what would you suggest as a way to get my option payout to look more like a spot trading position payout. I understand that delta tells you how closely option follows the underlying spot price, so does that mean the option needs to have a delta of 1 to follow the spot market payoff?
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Yes, a deep ITM call option will have a delta close to 1 (-1 for puts), however these don't have much leverage and are usually a lot less liquid.

I don't think you should try to replicate your spot payout with options. Options are a completely different animal and it is not as simple applying your spot trading strategy to options, cause of all the other factors you need to consider, such as volatility, time to expiry and etc.
 
Strike Price 2.1112
Expiry Date 15-Nov
L/S Long Put
Amount 50,000
Open Price 0.0112
Current Price 0.0412
Market Value Profit/Loss 2,070
Profit/Loss in USD 1510
% Price 270%

I agree with you, i bought an atm long put on pound at 12-Nov and i am currently making a 270% return on my position, whereas in the spot market i would have been making 160% return.
 
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