Our focus in Part 4 of the series is to demonstrate how USX currency options can be used for directional trading through the direct purchase of a call or put option. Options offer investors a way to buy a long position with a defined risk (limited to the cost of the option), while providing speculators a means to take on highly leveraged positions without needing to manage their risk with tight stop losses.
In our first scenario, our investor is bullish on the U.S. dollar, anticipating a material rise into the year-end.
• Current price: 1.3080
• Target price: 1.3500 or (135 cents)
• Anticipated time needed: 60 days
• Desired exposure: $100,000
Based on these criteria, our investor focuses on buying the December 2019 expiration and, in particular, the at-themoney 131.00 strike call with an ask price of 1.03, as shown in Table 1.
If you need to refresh your memory on contract specifications, see Currency Options University – Part 3
As per Table 2, our investor makes a $1,030.00 cash outlay to control a notional exposure of $100,000.00 in U.S. dollars. Although the investor is able to sell these options at any time prior to expiration, for sake of simplicity we will assume that he or she holds them to maturity. Now let’s look at the investor’s profit/loss position at various closing prices.
USD/CAD BFIX |
Intrinsic Value (BFIX – strike) |
Net profit / loss |
Profit/loss on 10 USX calls |
135.00 |
4.00 |
2.97 |
C$2,970.00 |
133.00 |
2.00 |
0.97 |
C$970.00 |
131.00 |
0.00 |
-1.03 |
-C$1,030.00 |
129.00 |
0.00 |
-1.03 |
-C$1,030.00 |
The key takeaway here is the asymmetry of the outcomes. Even though the table ends at 135.00, our investor has unlimited upside potential if the price of the U.S. dollar continues to appreciate beyond the target. At the same time, the maximum risk of loss is defined by the cost of the call options. This gives the investor more certainty when sizing the trade.
Another consideration is that leveraged traders tend to use Forex markets with stop loss orders as their risk management tool. This may work for some traders, but many often underestimate intraday volatility, seeing their positions hit the stop loss level and then watching the currency resume the desired trend.
In our second scenario, our investor is bearish the U.S. dollar, anticipating a material decline into the year-end.
• Current price: 1.3080
• Target price: 1.2700 or (127 cents)
• Anticipated time needed: 60 days
• Desired exposure: $100,000
Based on these criteria, our investor focuses on the December 2019 expiration and, in particular, on the put with a 130.50 strike and an ask price of 1.00, as seen in Table 4.
In this second example, our bearish investor makes a $1,000.00 cash outlay to control a notional exposure of $100,000.00 in U.S. dollars, to the downside. Now let’s take a look at the investor’s profit/loss position at various closing prices.
USD/CAD BFIX |
Option profit (strike – BFIX) |
Net profit / loss |
Profit/loss on 10 USX puts |
132.00 |
0.00 |
-1.00 |
-C$1,000.00 |
130.50 |
0.00 |
-1.00 |
-C$1,000.00 |
129.00 |
1.50 |
0.50 |
C$500.00 |
127.00 |
3.50 |
2.50 |
C$2500.00 |
Again we see the same asymmetry – an unlimited profit potential with a very specific level of risk, defined as the $1,000.00 capital outlay (the cost of the put options).
Currency options are one of many different tools used to participate in the currency markets. If it is important to take a leveraged position with high conviction while defining your risk in terms of a very specific worst-case loss, then you should consider implementing the trade with USX options.
Derivatives Market Specialist
Big Picture Trading Inc.
Patrick Ceresna is the founder and Chief Derivative Market Strategist at Big Picture Trading and the co-host of both the MacroVoices and the Market Huddle podcasts. Patrick is a Chartered Market Technician, Derivative Market Specialist and Canadian Investment Manager by designation. In addition to his role at Big Picture Trading, Patrick is an instructor on derivatives for the TMX Montreal Exchange, educating investors and investment professionals across Canada about the many valuable uses of options in their investment portfolios.. Patrick specializes in analyzing the global macro market conditions and translating them into actionable investment and trading opportunities. With his specialization in technical analysis, he bridges important macro themes to produce actionable trade ideas. With his expertise in options trading, he seeks to create asymmetric opportunities that leverage returns, while managing/defining risk and or generating consistent enhanced income. Patrick has designed and actively teaches Big Picture Trading's Technical, Options, Trading and Macro Masters Programs while providing the content for the members in regards to daily live market analytic webinars, alert services and model portfolios.