Foerx options and SWAP interest

Discussion in 'Forex Trading' started by thinkplus, Feb 8, 2008.

  1. I received an email from a service provider who has a successful LEAPS calendar/diagonal spread. but now he is offering similar type of service, i.e. Covered call on forex. Here is the description of the methodology:


    "With Forex, typically you can get at least 100:1 margin which means $1,000 of your money can control $100,000 worth of currency. Yes, that is very high leverage and that is a two-edge sword with plenty of risk. But, I'm going to explain to you that what I am teaching my subscribers and advocating which is "currency covered calls writing" as in your principle is protected as much as possible as in 99%. The point to understand is you can make or lose more money in Forex faster. And, of course my goal is to show you how to make more of it and make it faster with less risk.

    Writing or LEAPs calendar spreads outcomes, you may need to wait an entire month or more until you know what the final outcome is and what your true profit will be if any. You see, you can have your equity stock price drop and the call income you collected may not be enough to cover the loss equity
    value in the stock. In other words, there are risk involved and you will not know what the true risk until the written call option expires. In Forex, you will know exactly what your profit is when you start and it will 9 out of 10 be positive regardless which way the currency price moves. See the next paragraph for more details...

    4. In Forex Currency Covered Calls, your written call strike price and premium you do collect will provide about a 99% protection of your long currency pair value. In other words, the written Forex covered call premium will cover your entire risk of currency price decay. As an illustration, the currency options use number of pips to the strike price and some time value to derive the posted
    price of the currency call or put option. So, say you wanted to write a 1000 pips, one month of time out it would be priced at 1,175 pips which to simply one pip equals $10.00 each. The breakdown would be 1,000 pips for the call option spread to the call strike price and the extrinsic value for the time of 175 pips. When you write the call option you can select the strike price in pips for whatever you want and you collect the option premium without paying the spread commission.

    The currency Forex call buyer pays the pips spread and you would only pay the spread if you "buy to close" that call option which will be rare. You normally let the currency calls expire worthless the majority of the time or actually be called out of the position at the predetermined strike price and you keep all of the daily SWAP interest and your original investment capital the way I have it set up. It is the SWAP interest that makes you a no questions asked return, day in and day out, every month after month!

    Yes, you are reading this correctly and you would be foolish to not become a subscriber of mine. I can help you!

    Again, I need point out this MAJOR difference in trading Forex.

    You see, unlike equity stocks and LEAPs, Forex currencies pay interest everyday called SWAP and that interest is based on the $100,000 per lot per day. That SWAP interest alone will generate a 18% percent return per month without ANY compounding with the currency pair we use. That is what is known as "Carry Trade" people. Banks and astute investors do this all of the time and you could as well. One lot which would require $1,000 of margin could generate $711 SWAP interest per month which is an easy 14.22% return with only one trade per month with your ENTIRE principal covered by the written call premium.

    You see, we are after the SWAP interest and the time value in the call option price.

    Once you get the feel for the process, you can slowly increase the leverage percent and the number of lots which dramatically increases the daily SWAP amount of income which is the main objective and fully in your control. The other market factors like amount of price movement of the currency pair is the unknown exactly. But, the pips you collect from the call write covers your tail. Therefore, 1000 pips in our example would be your wiggle room and peace of mind before you would need to act.

    The way I have it working I will provide an Excel template with the exact limit and stop orders which will handle those defensive actions for you. So there is some limited minor risk, but it is *much* safer than expert advisers (EA) on auto-trading!

    Once you set your parameters in the Excel template during the planning stage, place your two separate orders, you turn off the computer and you could wait and do nothing until the option expiration day or either the limit or stop order is triggered.

    Bingo! It is that simple and every outcome within reason are calculated to avoid a disaster and margin call.


    I am new to forex or options on forex. My question is:

    1. "principle is protected as much as possible as in 99%" - Is this too good to be true?

    2. How do I get more information about the SWAP interest, and is it possible to get 18%?

    3. What is the best place to learn options on forex, and is it possible to cover most of the capital via premium as described above?

    4. Any other suggestion?

  2. It's complete and utter bullsh*t. The carry is embedded in the option valuation. FX option traders solve for the swap to expiration by pricing the atm call and put. A positive swap pair [long base GBPJPY] will express the following values:

    Spot: 208.76
    30-day, 208.76-strike call: 3.31 bid
    30-day, 208.76-strike put: 4.08 bid

    It's a simple matter to solve for the carry received when holding x-units of GBPJPY; in this case it's 77 pips. The above prices are current dealer indications on real-time vol. As you can see, the calls are priced at a discount to the puts. The swap discount is what distinguishes BSM for equities from GK for FX modeling. It's all about the swap/STIR-differential.

    IOW, there is no advantage in buying spot and selling the call over simply selling the atm put, as the call is discounted = the swap received on the long carry trade. Obviously the fool has never actually priced the options and is dangerously-ignorant to imply there is a free swap-isolation or arb. There is no free-lunch here. The trade is locked via the conversion arbitrage -- if the call traded equal to the put it would be possible to isolate the swap with zero-risk. Long spot/short call/long put = long natural/short synthetic.
  3. Atticus,

    Well first of all. To do the cmparsion prooperly, you have to compare
    the bid price of the call and ask price of the put (not the bid for both)...

    Using the GBP/JPY as an example and say a 7 day opton expiry, you will find a
    about a 35 pip difference between what you redived for the short call and what you pay for long put...assuming you buy the spot at X and write the call and buy the put at the price paid for the the way when you put his trade on, you re effectivley using no margin (at lesat with my broker)...

    Now, the key is how do you make up the 35 pip differnce and make it essentilally a cost free carry trade for the duration of the option?

    think oustide the box..
  4. Cybren


    The think outside the box remark is uncalled for I would say. Atticus is spot on and is right. Ofcourse trading the synthetic (reversal or conversion) would cost money as dealt through a broker or market maker they will add spreads to the options and underlying pair. But Atticus is not trying to explain that trading this would earn money or break even. He explains some others that there is no free lunch here and tries to warn less educated guys on the forum. thumbs up for him!

    How often do I have to read on forums about people that think there is money to be made hedging a carry position by options or futures. Will they never learn interest diffs are calculted in these prices?
  5. I posted the bids to simplify the point and to show the correct swap value isolated from bid/offer variance. You can't quote a market as spreads will differ. I pay three pips on GBPJPY and others may pay six. My straddle/synthetic market on the pair is six, others may see ten to fifteen.

    There is no "key" to make up the differential; it's arbitrage equivalence. The buyer of spot will recover the swap less the edge loss on the 3-way. The mere fact that you would make that comment proves that you haven't a clue what you're talking about.
  6. Thanks Cybren. Yes, hubris kills.
  7. I guess I struck a nerve with my relatively tame commenets...

    My experience is in equities and options and I am sure that you and other denizens of this forum consider yourself gurus when it comes to the forex (based on the number of posts you make, one wonders whether you actually have any outside interests)...but lest others belive that in fact a carry-trade using can't be made relatively risk-free, let me bkeak it down for you..

    Buy one contract of the GBP/JPY at 211.00 (for example)
    Sell one call with a strike pirce of 211.00
    expiring in a week
    Buy one put with a strike price of 211.00
    expiring in a week

    The difference in cost you will pay for the put not coverfed by the proceeds of the call is roughly 35 pips...

    now, accordiing to your "analysis" this provies there is no free lunch as you put it...well, I guess you would be correct if you left it at that but there is a simple companion trade that will cover the 35 ip difference that requies very little maintenance and approximzately 75% of the time, isn't even a factor in the overall structure of the hedge...

    What is it? Sorry, since I obviously do not know what I am talking about, I woun't bore you with the details of how to make a truly proper hedge/.carry trade.....but then again I'm sure you are already indepdently wealthy and tha's why you have so much time to post :)
  8. I don't like repeating myself. I defined the arb in the thread linked below. Stupidity is a pet-peeve of mine.

    The weekly swap on gbpjpy is nowhere near 35pips, it's 20 pips at fairval. A month ago you assumed that you could isolate the swap via a collar-transaction, which was in fact a conversion:

    Now you state, "but there is a simple companion trade that will cover the 35 ip difference that requies very little maintenance and approximzately 75% of the time."

    Beyond the grammar, complete and utter vomit. Wow, 75% of the time you earn the 20 pips, and the other 25% you lose 400? A month ago you were just clueless, but now you're regressing. It's not my analysis -- it's a simple parity calculation. You know, find for x. You're implying there is method to isolate the swap which is moronic.

    Oh snap. You're not going to tell me.
  9. parisd



    I regret to say that despite your high level of posting and your high level of option knowledge you give me the impression to jump rapidly to conclusions saying there is no free lunch and taking for idiot people trying to find a way to collect swap interest at a low risk (dont take me wrong I did not say at zero risk using collar or arbs)

    So on one side you state it is impossible and the other side there are people not thinking and relying on you or other main contributors of that Elite forum and hopefully there are also people working their way at finding solutions, and yes there are ways to do it and there are groups of traders doing it.

    Personaly I am interested by people trying their way even if they go wrong at the beginning instead of taking whatever others write for cash.

    Just a stupid statement that seems far away from the subject at which I would expect some thinking; stock and stock option do not carry swap, despite this some peple trade stock CC at 50% margin and get some regular return from them, please do not come back to tell me I am another stupid learner, it may be true butyou dont know me, same as I dont know you except through your writting.

  10. I find arbs all the time. Many are not worth the effort due to ROI among other factors. Conversions/reversals are the most basic of vertical arbs, so I am sure it seems reasonable to you that there wouldn't be such obvious low-hanging fruit. The swap embedded in FX options is no different that the implied forward embedded in equity call options. Case in point; price the GOOG Jan 08 atm call and put. Can we arb the call/put premium?

    I become irritated when we start the discussion with arbitrage and it vectors into talk of selling gamma to recover swaps. Don't deal in GBPJPY if your intent is to somehow isolate the swap. The result will simply be a greater loss of edge due to vol of vol. Stick with the swap in EURUSD if you want to play with it as a hobbyist. Trading arbs at a small loss is a great learning tool.

    There is a place for marketable-arbs in liquid assets; conversions traded under JBO-leverage, boxes into a STIR prediction, etc.

    FWIW, I have an arb paying 17% on 10-14 day durations. It's been exploitable for weeks -- so I am not intolerant in this regard. ;)
    #10     Feb 17, 2008