Investing in Forex Options

1. Investing in Forex Options Presented by: Zoe Fiddes

2. easy-forex® endorses responsible and moderate trading. Options relating to forex trading (OTC Trading) involves substantial risk of loss up to your invested capital, and may not be suitable for everyone and we would like to recommend you not to risk any money that you cannot afford to lose. Please note that the information and content provided in our workshops and/or seminars is made available for informative and educational purposes only and can under no circumstances be considered as a recommendation to you by easy-forex® or any easy-forex® personnel to engage in any trade. Hence, neither easy-forex® nor any of its personnel can under any circumstances be held responsible for any outcome of trading decisions or trades in regard to any of these workshops and/or seminars. Easy Forex Trading LtdRegulated by the Cyprus Securities and Exchange Commission CySECLicense Number 079/07

3. Investing in Forex Options • This is a product that gives you the ‘right’ to execute a buy or a sell trade at a price that you have chosen, but you are not obliged to do this. • For example, let’s say the spot price of EURUSD is 1.3100 and I get an option with the ‘right to buy’ it at 1.3200 with expiry in 7 days. Note that we call 1.3200 the ‘strike’. • If the market moves to 1.3300 before the expiry date then I would be ‘in the money’ as I have the right buy 100 pips lower than the spot price. • In the same way I could have bought an option with the ‘right to sell’ if I expect the price to fall before the expiry date. 1.3200

4. Cost of an Option • You have to pay for an option upfront. • This fee is called the premium • You can close the option at any time before expiry; you will only do this if the option has made you money. • The option will be in profit when the live premium is greater than the premium you paid, i.e. you can sell the option for more money than you paid for it. • P&L =Live premium of open option –Premium you paid initially

5. Time Value Option Price Intrinsic Value

6. Intrinsic Value When the strike is preferential over the spot rate the option is ‘in the money’ (ITM) Intrinsic value = 0, until the option is ITM. For example, if my strike to buy is 1.3200 but the spot rate is 1.3300.

7. Time Value At expiry, time value = 0 Made up of several components but primarily volatility and time to expiry • More volatility = higher time value • Longer time to expiry = higher time value

8. Profiting from an Option • Aim: to buy an option at one premium and sell it later at a higher premium either before the expiry or at expiry. Any profit will be transferred into your account automatically. • How can the premium of your open option be higher than premium you paid? • If the spot moves in your favour (intrinsic value increases) • If volatility increases (time value increases) • Unlike normal spot trading you do not only profit from the move - you can also profit from the volatility!

9. Increase in Intrinsic Value before Expiry • right-to-buy example • Option with ‘right-to-buy’ €100K EURUSD at 1.3200, 7-day expiry • Spot rate at open = 1.3100. Premium = $400 (time value only) • With 6 days to expiry, spot has moved to 1.3300 => 100 pips ‘in-the-money’ => Premium = $1330 ($1000 intrinsic value + $330 time value) • Sell the option back => Overall profit = $1330 - $400 = $930 • Notice that time value has decreased as the option’s validity is 1 day less.

10. Increase in Intrinsic Value at Expiry • right-to-buy example • Option with ‘right-to-buy’ €100K EURUSD at 1.3200, 7-day expiry • Spot rate at open = 1.3100. Premium = $400 • At expiry, spot is at 1.3300 => 100 pips ‘in-the-money’ => $1000 profit • Overall profit = $1000 - $400 = $600 (intrinsic value only)

11. ‘Right-to-buy’ example – Call Option value of option at expiry

12. ‘Right-to-sell’ example – Put Option value of option at expiry

13. Jargon Call = right-to-buy Put = right-to-sell Strike = execution rate Premium = price of the option Intrinsic value = the amount by which the option is in the money Time value = Price (value) of the option less its intrinsic value OTM = Out of the money ATM = At the money ITM = In the money

14. Why Trade Options? • Options are very versatile and can be used in many ways. • Speculation • You can speculate on the future exchange rate or price volatility • Insurance & Hedging • Options are one of the best ways for a business or individual to protect themselves against exchange rate risks. • Insure/hedge an existing open forex deal against a loss • Insure/hedge the cost of an upcoming trip abroad • Insure/hedge a companies international trading (profits are protected from an unfavourable move) • Insure/hedge a foreign currency loan • Professional strategies to suit advanced traders

15. Building Strategies Strategies involve trading a number of options at once as part of a single trade. This opens the door to dynamic trading. The Long Straddle An option where you buy a call and a put at the same time. This enables you to profit from a move up or a move down. For example, you buy a call with strike 1.3200 for €100K EURUSD and at the same time you buy a put with the same strike and size. Say the premium is $650 for each, hence total price is $1300. Your call will be ITM if the spot price goes above 1.3200 and your put will be ITM if it goes below 1.3200. But you need to make your cost back first.

16. The Long Straddle Here are the scenarios of cash flow based on intrinsic value at option expiry

17. The Long Straddle Now if we include the price we paid for the option strategy

18. The Long Straddle – price at expiry

19. Conclusion • A new way to trade with more choices • Cannot get stopped out • Exchange rate insurance • Loss is capped whilst profit potential is unlimited • Great chance to try something new • Copy strategies in the strategies marketplace

20. Your first options trade is risk free up to £100* Register by 2 Feb. and complete a trade by 8 Feb. Step into the future of trading – trade forexoptions today *Terms and conditions apply

21. Questions? Step into the future of trading – trade forex options today