I’ve know about some currency options for awhile now. They trade on the PHLX and are dollar indexes based on the majors. XDA, XDN, XDE, XDC etc. They’re contract size to equal about a mini lot. They have very low open interest, but seems like market makers always have a decent amount of bids and offers so seems they’re liquid yet have low open interest if that makes sense. The spreads aren’t horrible for options either ATM of .05 or less which equates to about 5 pips. Not as good as spot FX but not horrid, not good for short term where every pip matters. Just wondering if there is any risk because of low open interest? And why are so few traders using these. I get it they wouldn’t be good for short term strategies but seems to me they’d work for those looking to trade daily or weekly candles holding for 100 pips plus. The premium and theta decay is a down fall but leverage is not far off spot when buying ATM or slightly ITM 50/1 to 75/1 for about a month out. I get premium is a negative aspect but all said and done the underlying move enough to offset premium which seems to be about a day or two of ATR. I feel like these have an advantage of being able to hold and not get stopped out in Spot with whipsaws and stop hunting then watching the move go as anticipated. Seems I can position size an option to be 2% risk on account value and slippage or nothing would increase that risk unlike spot. I also get being limited to US time is a negative but again not using it for anything less than daily. Any thought why traders don’t like these or why they should be used or avoided? I honestly love the concept as someone using daily candles.
It's probably mainly because, like fx spot, fx option trading largely takes place away from exchanges. After that, for the majors at least, CME fx futures options are pretty liquid and reasonably well traded. So for the venue you describe is like the 3 tier of an already heavily supplied market.
I don’t argue that this is a third tier market at all. I agree, spot is #1 CME options are more popular. I would think though that CME contract specifications are too big for average newer retail traders to properly position size. Figure you’d want close to a six figure account to play there and i know most traders coming to FX new don’t have that, so I’m just surprised how low open interest is on the PHLX options I would think of the many traders out there at least a handful of others would’ve thought the way I do and have interest. Unless they’re too short term, or options provide a another level of understanding retail doesn’t have an interest in, or I’m not seeing something I should. I just wonder if low Open interest would be a issue for me to trade them if market makers are keeping the bid asks liquid and fairly tight I’m not seeing a huge drawback. You did mention off exchange, where do you find off exchange options on FX?
By off-exchange I mean the over the counter market (OTCs). I think the big banks still dominate this arena in terms of market making but I don't have figures. AFAIK Saxo is the only place retail traders can access this market but I might be wrong.
To me, that does sound "horrible". You're saying, here, that they're "not as good as" something that's notoriously punitively bad, it seems to me? I don't know enough about them to answer confidently (and maybe not many people do, and maybe that's part of the reason?) but it seems to me, from what you say, that "hugely adverse dealing costs" must be pretty high on the list of potential reasons for that? In that case, surely the question is: why would someone looking to trade daily or weekly candles, holding for 100+ pips, need or want to use them, when they can effectively already do exactly the same thing at lower cost?
Remember these are FX options, not spot. The spread for FX options was always massive when I've looked, way more than 5 pips.
Sorry I didn’t post more clearly but didn’t want too much for ppl to read. And my writing is awful. The reason to use them would to be able to sit out whipsaws and market spikes that typically stop traders out in spot then after being stopped out the trade goes their original way. Gaps on weekends, slippage all things that can increase your stop out pips and your risk. I think a lot of us experience that in forex. Certainly being stopped out of a trade that goes positive shortly after is an extra cost of using spot. I see a lot of ppl mention those things and I’ve experienced it. Maybe the way you trade is different or you’ve found ways to avoid these which is great. I see them as an opportunity to hedge and avoid those type of issues, yes at an increased cost per trade but overall with elimination of other problems and less stop outs idk. I’m looking at them as a method to mitigate the issues. I get it theta decay is a problem that’s where options knowledge comes in. Using options your risk is completely defined doesn’t matter if PA moves against me huge, as long as you’re not writing naked. I do feel like it’s confusing because you are crossing two markets options and FX which usually don’t go hand and hand. But that’s what I like about them credit/debit spreads straight long options andd they don’t tie up much capital. Risk is 100% known slippage catalyst etc. can’t effect that max loss is max loss no matter how much the underlying moves. When you’re risking 2% of your account the other things can’t add up and make it 2.5% etc. This is an extreme example but think of all the ppl that thought they were position sized for 2-3% risk the day CHF released its price floor from EUR. Options your out premium spot you lost 100s of pips in slippage and many ppl blew up accounts that day. I really didn’t know if I’d get any reply’s not was hoping maybe someone somewhere has experience with them but idk?