The Forex Options Course: A Self-Study Guide to Trading Currency Options

Preface ix

Acknowledgments xi

About the Author xiii

PART ONE Key Option Elements 1

CHAPTER 1 The Elements of an Option Trade 3

Plain Vanilla Options 3

Purchasing an Option 3

Writing an Option—Beginners Don’t 8

Elements of an Option Trade or Ticket 10

The Greeks 15

Summary 23

CHAPTER 2 What Affects Forex Option Prices? 25

Time 25

Volatility 27

Summary 50

PART TWO Forex Market Drivers 51

CHAPTER 3 Finding Direction for Your Forex Option Trade 53

The Importance of Interest Rate Expectations 53

How to Anticipate the Direction of the Federal Open Market Committee (FOMC) 54

How to Use Housing Sector Data for Developing Forex Option Trade Direction 62

Evaluating Real Estate Exchange-Traded Funds (ETFs) 71

Summary 77

CHAPTER 4 Tracking Fundamental Directions 79

Using Currency Targeted Exchange-Traded Funds (ETFs) to Determine If the Market Is Dollar Bearish or Bullish 79

Diagnosing Global Economic Conditions 83

Group Currencies by Purchasing Power Parity (PPP) (Big Mac Index) 84

Tracking the Currency–Commodity Connection 94

The Currency Outlook Checklist 97

Summary 98

PART THREE Timing the Trade with Technical Analysis 99

CHAPTER 5 Chart Patterns and Trade Entry 101

Chart Patterns and How to Use Them 101

Scanning for Volatility 110

Summary 114

CHAPTER 6 Using Experts to Shape Trading Decisions 115

Forecasting Accuracy? 116

Professional Sources of Expert Forex Opinion 117

Follow the Housing Prices 122

Follow the Think Tanks 124

Follow the Bank Forecasts 125

Summary 128

PART FOUR Forex Options Strategies 129

CHAPTER 7 Vanilla, Spreads, and Volatility Strategies 131

Plain Vanilla Strategies 131

Currency Pair Spreads: Playing the Correlations and Divergencies 133

Commodity–Currency Spread Strategies 139

Carry Trade Option Strategies 144

Trading Delta Call/Put Ratios 147

Trading Vega or Volatility 150

Gamma Spread Trading 154

Key Forex Option Combinations and Components 156

Summary 163

CHAPTER 8 Binary Option Strategies 165

What Is a Binary Option? 166

Using Exotics to Derive Market Sentiment 170

Combining Binary Options with Plain Vanilla and Spot Trading 173

Summary 177

CHAPTER 9 Option Strategies for Extreme Outcomes and Scenarios 179

Recession in China or Continued Boom 179

Option Trading to Play Carry Trades with Hedge—Putting on Collars 181

$ 1000 + Gold and $200 + Crude Oil 182

Trading $Oil Shock ($200) in Forex Options 183

Play a U.S. Stagflation and Inflation 184

Preemptive Attack on Iran 184

Recovery of Housing 185

Summary 185

CONCLUSION Putting It All Together 187

Achieving Optimal Forex Option Trading Fitness 187

Forward Testing Your Forex Option Trading Fitness 188

Where to Trade Forex Options 189

APPENDIX Selected Futures Columns 191

Index 213