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The Next Generation of Currency Trading

Ashish Advani (July 15, 2009)

Wednesday, July 15, 2009

…Just Began This Week

Also In Today’s Letter…

By Ashish Advani Yesterday, I explained why the perfect storm may be forming for the Mexican peso. I told you why a recent political twist has completely changed my opinion about the peso.

But I also told you how short the peso with just released put options now available on the NASDAQ OMX (Philadelphia Stock Exchange).

But frankly these new Mexican peso options are just part of the story. In fact, the NASDAQ OMX just launched three other NEW currency options this past Monday.

This is huge folks.

The Philly Stock Exchange first introduced these “stock-like” currency options back in July 2007 – a full two years ago this month.

Now the Philly Exchange was not the first to introduce currency options, but they were the first to offer “stock-like” currency options that trade just like options on your favorite shares of IBM or Coca-Cola.

If You Can Trade Stock Options, You Can Trade These Currency Options

These “stock-like” options trade as closely to stock options as possible. You can buy these currency options at the same times as stock options every day (9-4:30 EST five days a week), have the same expiration dates (third Friday of the month), and they’re dollar-denominated, so they’re settled in dollars just like any stock option.

Just like regular stock options, your risk in buying these options is strictly limited. You only ever risk the amount you paid for the option or your “premium.” Then if your option should expire worthless, you only lose your initial investment.

Also, they’re available through any options-approved stock account. This means you don’t have to open a new account if you’re already trading stock options.

What’s exciting about currency options is such leveraged products truly have the potential for larger gains. In fact, regular retail investors have the potential to make double or triple-digit gains off such options.

In other words, you can make Forex-type gains on these options with fewer trades a year.

Finally, “Stock-Like” Options on Exotic Currencies

For the past two years, investors have only been able to buy these stock-like currency options on six currencies: the euro, pound, Swiss franc, Australian dollar, Canadian dollar, and Japanese yen. In short, you’ve only been able to buy these options on the major currencies on the NASDAQ exchange.

But now, the NASDAQ is starting to branch out. This week the NASDAQ OMX introduced call and put options on FOUR new currencies including two exotic currencies…

  • Mexican Peso
  • New Zealand Dollar
  • South African Rand
  • Swedish Krona

These options started trading this past Monday. As I mentioned yesterday, I most interested in the put options on the peso at this point. I’m watching these offerings closely to see if there are any entry points.

For your part, if you’re interested in investing in these currency options, I recommend keeping a sharp eye on the trading volumes for these currency options in the days and weeks ahead before you start playing in this expansion in the options markets.

Your Checklist for Buying Currency Options

Indeed, when you’re evaluating these new currency options, there are few things you should keep in mind including…

Duration to Expiry: You should choose currency options with maturities far out so that the currency has the time to develop the direction you choose. But remember, too much time to expiry will mean that you are paying too much for time value of the option. So choosing the right expiry date is critical.

Strike Price: It is also important to select the correct strategy for the option strike price. The strike price refers to an option’s level of execution. You could choose between In the Money, At the Money or Out of Money Options.

Premiums: You should carefully consider the premium that you are paying for any currency option. Premium consists of time value and intrinsic value.

Intrinsic value is the difference between strike price and spot price (as long as intrinsic value is not zero or negative). Total Premium – Intrinsic Value = Time Value.

Liquidity: Currency options are not as commonly traded as stock options, so you must watch the liquidity in these markets. You want greater liquidity for your option trades. Also keep in mind, often the trader who is buying or selling an option from you could be a very large brokerage or bank. So the liquidity will always be there in a traditional sense.

But since these options do not trade very frequently, you are, at times, at the mercy of the liquidity provider for option pricing. For options pricing, no one can deny you the intrinsic value of an option. But the liquidity provider can always estimate the time value. You must consider this carefully when choosing an option, which may have too much time value in it.

Again, I’m watching all four of these currency options. And I’ll be back here in FX University if I see some more opportunities arise in these options in the future. But in the meantime, take a look at these new offerings. You can learn more about them here.

Yours in FX Profits,
Ashish Advani

EDITOR’S NOTE: Just in the past nine months, our Global Currency Options have used these types of “stock-like” currency options to grab gains of 92%, 105%, 114%, 135%, and up to 213% on single currency plays. All the while, they’ve only risked the initial cost of each option contract (another serious benefit of currency options). Find out more about their option strategy here.

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The New Dollar-Denominated Options