Currency Box Options

Discussion in 'Forex' started by ZoneTrooper, May 21, 2007.

  1. Hey has anybody tried making money with box options on Oanda?

    Looks interesting, but often times things that looks that good, turns out to be another method for a dealer to take some more money out of your pocket and put it into his.
  2. The initial pricing indications are very tight with interbank. The secondary market is substantially worse, but it's a function of the discrete expirations at Oanda. Interbank expirations are usually NY and London cuts, while you can construct an expirations at 5-minute intervals with Oanda. Oanda doesn't shade price and the fills are instantaneous -- no desk intervention. The only caveats are the global account limit of $20,000 debit on the boxes, and the market on closing positions. You'll need to hedge with spot/options in lieu of offsets.

    Forward start options are available by extending the box start into the future. A nice feature made available by the 2D box.

    Touch options are very risky instruments.
  3. Hi Atticus,
    I have a copy of 'Dynamic Hedging', thats sits on my shelf mocking me.... it was too much too soon.
    Could you please point me in the right direction in working out how to hedge something like Oanda's Touch/No-Touch offerings, a dickheads guide if you like... I'm fascinated by these products...
    How would one, for example, hedge a one week no touch /1.98 / on cable?? where to start?
    I can grasp synthetics and hedging in the plain vanilla products.
    Any help would be much appreciated.

  4. There are a couple of schools of thought; dynamic and static/passive hedging. Dynamic hedging would involve trading spot in an attempt to replicate the gamma curvature, or by trading into some price-predictor.

    A passive hedge is simply solving for an acceptable risk-reward should the barrier be hit.

    I trade the touch market via directional-spec and a stat-vol prediction. The directional positions carry very small, if any, hedge against the barrier. The stat-vol trade is a price distribution bet in which I am aggressively-hedged, typically producing no worse than a 2:1 risk at the barrier.

    The stat-vol bet is hard-won. I would recommend trading the touch markets under a directional bias.

    As they say, "Easy to price, tough to hedge."
  5. The pricing is heavily, heavily, heavily rigged against you, to the point of making it almost impossible to significantly profit over the long term.
  6. Wrong. Vols are within 20-basis of Interbank. I know, I carry 7-figures in touch markets on a daily basis.

    Price both the hit and miss bullet *moneyness to arrive at notional edge-loss. Most bets are running -15%. You'll never trade a touch market if you think the bets are bad. They ALL seem egregiously priced. Prices improve as bets flip modality from gamma to vega.
  7. I just drew a box where, if it hits, I get paid $164 and if it misses, I pay $100. If I take the other side of the bet, where if it hits I pay $100, I only get paid $101 if it misses. That's egregiously priced; if the rest of the interbank options market is such a ripoff, then I guess I can't blame Oanda, but I don't see how anyone can make money trading a product with the odds so badly rigged against him.
  8. You priced a bet with an expiration of a few hours. You expect to go out 3 sigmas and be paid to miss? You can't model them and you obviously don't understand the mechanics. I give you credit for avoiding a market you don't understand.

    I'm not touting Oanda. You don't like them? Don't trade 'em.
  9. Advice to anyone looking to trade "cash or nothing" exotics -- spend the $82 to purchase Hoadley's derivatives XL add-in. Tab 26 contains the Rubenstein T/NT option pricer:

    UO = up n out [upside miss]
    UI = up and in [upside hit]
    DO = down and out [downside miss]
    DI = down and in [downside hit]

    You'll need to get strip vols from somewhere -- vanilla implieds from the CME FOs will do, and can be had from IB's TWS.
  10. So Atticus....

    How does one go about understanding these options? I have looked at these box options on Oanda when they first brought them out and came to the same conclusion as the OP. So I guess I don't understand them either. I'm quite familiar with equity options, although not a guru.

    Also, what are the benefits of trading these for directional spec over using the spot market?

    With kind regards,
    #10     May 22, 2007