Oanda just added BoxOptions to their platform. How do these work? From what I understand, I could draw a box in a selected area in which I think the currency pair will hit. I pay a premium right away for the BoxOption, then if the pair does not hit my box, I only lose the premium? How does it work if it does hit my box? How does it calculate how much I get? Thanks everyone, and have a great long weekend! -Kastro
It's a fixed payout. The price of the box can be conceived of as trading inverse to delta on the no touch, and trading = delta on a touch. IOW, if the box strike is 30 deltas, the purchase of "miss" [no touch] will run $70 for a $100 payout. I am using delta as a crude example. It's not representative of actual pricing. This is the abridged version. These are examples of binaries; they cease to exist once the barrier is reached. Full payout[loss] is received on a touch[no touch] if the barrier is hit prior to expiration. At expiration the touch bet loses the full debit paid and full payout is made on the no touch, provided the barrier is not reached. Miss = no touch Hit = touch This differs from digital options, "cash or nothing" most commonly, in which the spot contract must trade above[below] the barrier on a call[put] digital at expiration.
The initial pricing is acceptable, but the market-made on the offset is horrible; i.e., paying $1000 on a hit or miss and the immediate market made by Oanda is $500 if you were to trade-out of the box option. It's not much of an issue if you're intent on replicating a straddle with spot fx, but realize you will likely need to wait for a "hit" of the barrier. Oanda's spot fx pricing is so tight that you're better off steering clear of the BOs unless you believe they're substantially mispriced and are willing to trade against your deltas/gammas with spot.