01/11/2021 23:49 Forex option contracts, their impact and how to trade off them

Forex option contracts, their impact and how to trade

off them
 Wed 16 Nov 2016 12:15:01 GMT Author: Mike Paterson | Category:  Education (/education)

Here we explain what forex option contracts are and how to use the info

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Barrier options -

For those unfamiliar this is type of option whose payoff depends on whether or not the
underlying asset has reached or exceeded a predetermined price. A barrier option can
be a knock-out, meaning it can expire worthless if the underlying exceeds a certain
price, limiting profits for the holder but limiting losses for the writer. It can also be a
knock-in, meaning it has no value until the underlying reaches a certain price.

A DNT (Double No Touch) is an option that gives the trader an agreed-upon pay out if
the price of the currency pair does not reach or surpass one of two predetermined
barrier levels. Traders pays a premium and in turn receives the right to choose the
position of the barriers, the time to expiration, and the pay-out to be received if the
price fails to breach either barrier. With this type of option, the maximum possible loss
is just the cost of setting up the option

Once either side (barrier) is hit then the option ceases and the writer wins.

The giant Panda, aka Peoples Bank of China, have been notable users of these contacts
over the years and given the size of them, will defend a level rigorously. In recent
times we have seen EURUSD barriers mostly put in on in a range of 1.0550-1.1350 with
additional interest in between but these options can be traded in other pairs too of
course. Today we have barrier option interest at 110.00 on USDJPY.

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01/11/2021 23:49 Forex option contracts, their impact and how to trade off them

Barrier options are used particularly around times of great volatility such as the Grexit
turbulence (https://news.forexlive.com/!/dnt-options-back-in-play-with-the-greek-
uncertainty-20150626), Brexit, and US elections. Where we know the levels we will
highlight them in the daily order boards.

In today's EURUSD 1.0700 barrier option example we saw a successful defence

producing a rally but failing to make headway above 1.0730 and eventually being
breached as general USD demand prevailed.

As a rule we can expect these levels ( bids or offers) to hold first time round and
therefore buying/selling into these levels will invariably bring some reward

Vanilla options -

My daily posts (https://orders.forexlive.com/!/option-expiries-for-the-10-am-ny-cut-

today-16-nov-20161116) refer to these that expire each day at 14.00 GMT. A financial
instrument that gives the holder the right, but not the obligation, to buy or sell an
underlying asset at a predetermined price, within a given time frame.

 A vanilla option is a normal "call" ( The buyer of the call option has the right, but not the
obligation, to buy an agreed quantity of a particular commodity or financial instrument
from the seller of the option at a certain time for a certain price. The seller is obligated to
sell the commodity or financial instrument to
the buyer if the buyer so decides. The buyer
pays a fee for this right ) or "put" ( gives the owner of a put the right, but not the
obligation, to sell an asset, at a specified price ) option that has standardized terms and
no special or unusual features. It is generally traded on an exchange such as the
Chicago Board Options Exchange.

This means that the contract will still be "live"/in play until expiry time which is generally
designated at 10.00 am NY ( 15.00 GMT) each week day. This is different to a " barrier"
option which is "dead" once breached.

If the prevailing price is close, say 30-50 pips away, and the expiry is large ( $750m +
but smaller in less liquid pairs) we can often see the price affected/magnetized as battle
ensues from both buyer and seller. We don't see the details of whether it's a "put" or
"call" but the price action leading up to the event is what we're really looking for.

There is no precise science to this and any impact will largely depend on the prevailing
market sentiment, but yes we can sometimes see a sharp reveral leading into the expiry
only to resume previous trend after.

I cover options, orders, flows and liquidity in our online training courses that have
proved very successful in the past 18 months. Keep your eyes peeled for the next one
where you'll be able to spend 2 hours in a webinar with me and have the opportunity to
answer questions.

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01/11/2021 23:49 Forex option contracts, their impact and how to trade off them

I hope this has helped your general understanding of how these instruments can
impact on flows and therefore hopefully add another weapon to your FX trading
armoury.

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syed abbas • 5 years ago

where is the like button Mike, good precise and helpful post. thankyou
1△ ▽ • Reply • Share ›

MikePaterson1 > syed abbas • 5 years ago

Thanks Syed
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Guest • 5 years ago

yes, thanks for this post. now i can read chinese! ;)
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MikePaterson1 > Guest • 5 years ago

Still confused Grasshopper? Let me have any questions but I'm heading out now til
tomorrow. Will reply then.
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Guest > MikePaterson1 • 5 years ago

no no... i meant that what used to be chinese before the post, is now clear.
thanks for posting it.
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MikePaterson1 > Guest • 5 years ago

Good to hear Grasshopper
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MaxL • 5 years ago

Thanks Mike.
△ ▽ • Reply • Share ›

MikePaterson1 > MaxL • 5 years ago

Yw Max
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01/11/2021 23:49 Forex option contracts, their impact and how to trade off them

Bud Spencer • 5 years ago • edited

And now Mike, after all that explanation - you need a beer!

And I need to buy an armada of EUR call options. :=)

Because everything that goes down, must come up again!

1△ ▽ • Reply • Share ›

MikePaterson1 > Bud Spencer • 5 years ago

Lol. Thanks Bud !
1△ ▽ • Reply • Share ›

Alvin Wong • 5 years ago

When is yr next webinar?
△ ▽ • Reply • Share ›

MikePaterson1 > Alvin Wong • 5 years ago

It will be part of our next week-long paid-for course Alvin. We will update you all
when we have it ready to go.
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kieran • 5 years ago

Interesting Mike,would you use these expiry levels as possible future prices?
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MikePaterson1 > kieran • 5 years ago

Future prices Kieran ?
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kieran > MikePaterson1 • 5 years ago

Like you mentioned a magnet towards the option expiry price on expiration.
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01/11/2021 23:49 Forex option contracts, their impact and how to trade off them
py

Siyabonga Khumbuza • 4 years ago

Can you guys help me to learn Binary Option?
△ ▽ • Reply • Share ›

BenBrown > Siyabonga Khumbuza • 4 years ago

Still see you were waiting on answer Siya. Well, that is because many don't
understand Binary Options but once you do a whole new stream of risk-free
income is available. You can email a gmx account for info. Benbrown1212
@gmx.com
△ ▽ • Reply • Share ›

English > BenBrown • 4 years ago

NOTHING repeat NOTHING is risk free.
△ ▽ • Reply • Share ›

BenBrown > English • 4 years ago

On a technical level, yes risk is involved in any endeavor. However,
we are now in the information age and as such there is on longer
any need to settle for less than 10-30% weekly gains. The risk then
becomes missing out on gains that many are already partaking of.
△ ▽ • Reply • Share ›

Simon • 4 years ago

So for a vanilla option the buyer would like to get the price down/under the predetermined
price (to potentially buy at a reduced price thus making/saving money) whereas the seller
will want to keep the price above the predetermined price or therabouts?
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Simon > Simon • 4 years ago

These options still confuse me a little.
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Christopher Chew • 4 years ago

Hi Mike, when is your webinar held?
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MikePaterson1 > Christopher Chew • 4 years ago

We don't have specific dates planned for this year Christopher. The webinar was
part of a week-long course we ran in previous years when we still owned the
company.
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Christopher Chew > MikePaterson1 • 4 years ago

I see. How do we learn to trade off the options from here. Any advice?
△ ▽ • Reply • Share ›

Raffel Cruz Rodriguez > MikePaterson1 • 4 years ago • edited

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01/11/2021 23:49 Forex option contracts, their impact and how to trade off them

Hi Mike when and how can i subscribe for this course?

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Gading Reacher Hutasoit • 4 years ago

so, is it now time to sell euro? or buy euro?
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joe • 4 years ago

thank you Mike...this is really helpful...thanks again
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Moku Ichi • 4 years ago

Thanks for this mike! Godbless!
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MikePaterson1 > Moku Ichi • 4 years ago

Yw Moku Ichi. I hope it helps make you a few pips !
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souldigits > MikePaterson1 • 4 years ago • edited

I see your description on the use of options expiry as a magnet towards
price. So what is your opinion on this as a trade could be masked on high
frequency trading. Do you watch the interactive brokers advert on
bloomberg what HTF does to retailers.
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Eckel Paul • 4 years ago

Where can one purchase vanila options ? the only option instrument I know for USDCAD
is FXC and the volume and open interest is ridiculous ?
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Eckel Paul > Eckel Paul • 4 years ago

Where can one purchase vanila options ?
△ ▽ • Reply • Share ›

Olus A • 4 years ago

Great article Mike, When is your next Online Training Course?
△ ▽ • Reply • Share ›

Isaac • 4 years ago

Red this, but still feel green. Need to understand more on basics. The beauty is, it has
thrown light to the importance and effect it would have on fx.
△ ▽ • Reply • Share ›

Petefx • 4 years ago

just read this Mike, awesome
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MikePaterson1 > Petefx • 4 years ago

Glad it helps Peter
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Mike Dean • 4 years ago

Where is this info available?
△ ▽ • Reply • Share ›

Shanice Shaunte' Jefferson • 4 years ago

OOOOHH. I think I somewhat understand it better now. Thank you!
△ ▽ • Reply • Share ›

Jorge A. Rodriguez • 4 years ago

Hi Mike,

I am really interested in attending your next webinar on this topic. Im relatively new to FX
and will love to undestrand this topic fully.

When will you have the next one?

Thanks
△ ▽ • Reply • Share ›

MikePaterson1 > Jorge A. Rodriguez • 4 years ago

Unfortunately we don't have them anymore Jorge. We ran them as part of a paid-
for education programme previously.
△ ▽ • Reply • Share ›

Jorge A. Rodriguez > MikePaterson1 • 4 years ago

Is there some site you can suggest I go to learn more about how to use this
info to open (or avoid) trades based on this info? Thanks in Adance Mike!
Have a great week.
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MikePaterson1 > Jorge A. Rodriguez • 4 years ago • edited

Just stay tuned to my posts here Jorge
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Jorge A. Rodriguez > MikePaterson1 • 4 years ago

Will do Mike! thanks
△ ▽ • Reply • Share ›

Thembani Vundla • 4 years ago

Hi Mike can you please contact me on russelrubysinn@gmail.com
△ ▽ • Reply • Share ›

MikePaterson1 > Thembani Vundla • 4 years ago

Email sent TV
△ ▽ • Reply • Share ›
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01/11/2021 23:49 Forex option contracts, their impact and how to trade off them

Max Tor • 8 months ago

How do forex options effect the spot price ?
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Happy Child • a month ago

Thankyou... options are really hard to understand but at least this helped. :)
△ ▽ • Reply • Share ›

Ajay Redekar • 22 days ago • edited

Hey Mike, thanks for this good information. However can you please correct me if I am
wrong, the data you have posted can be used as a level where institutions have interest?
As I believe a lot of firms based on the liquidity at these levels wouldn't want to give away
the premiums and hence they manipulate the market. What is your view on it please?
△ ▽ • Reply • Share ›

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