FX vs. option on FX, what do you trade?

Discussion in 'Forex' started by mizhael, Feb 7, 2009.

  1. What's the benefit of trading option on FX vs. trading FX itself? Given the same amount of initial fund, which one will give the maximal amount of return? (implicitly assuming maximal leverage on each side?)

    I am trying to figure out whether I should trade FX or options on FX... or maybe there are futures.

  2. i would imagine hedging strategies are more dynamic with options... but you're question is interesting in terms of uncovered directional speculation using fx levarage.

    lets here what an ET has to say
  3. I am open to "covered" hedging play also. Your point is interesting. Why are the hedging strategies more dynamic with options?

    In this situation, you hold which instruments and use which instruments to hedge?

  4. Forex is a nightmare in one respect: Whipsaws are fatal. Whereas in the equity option market I could enter into a trade and provided I was right "eventually" (though within time limits of expiration and so as not to be excessively impacted by time value decay) I would make money.

    With forex I have to be right and have to be right immediately. Margin of error is non existent. I never had stops with options (I used mental stops) I always use stops with forex.

    Honestly, if there was a broker that offered options on many currency pairs and those options had equivalent leverage compared to forex I would stop trading spot immediately.
  5. The idea that FX is a zero sum comes into question, when you think about the market participants.

    There are those who are profit seeking traders and those that need to enter the market for operational and cash flow purposes. This effect is greater in FX over commodities/futures/credit markets just because of the scope/size/liquidity. Corporate users are not necessarily looking to profit from exchange rate fluctuations.

    When Sony forecasts demand/supply of products/inputs, it is possible to create a "structured FX product". The movement of USD/YEN can be fixed or allow for some directional bias and only the affect of revenues would be captured as profit.

    Even if a corporate user feels the currency is under/over valued, the main goal is to reduce foreign exchange risk - insurance - options.

    Case in point... corporate users pay a premium to the market. The idea is that corporate users... "leave money on the table" for traders to take.

    Back to the original point... increasing spot leverage to speculate in direction is not so different from buying a call at the most basic level.

    Responding to the previous poster saying that FX is a nightmare can be true simply because you are granted way to much margin at the retail level. You are under capitalized to trade fx options, apparently.

    The issue is you need to know what your margin call price is and what the range in periodicity is.

    PS.. i don't mean to sound like a lecturer - this post was a nice way for me to compile some thoughts
  6. And to further the point of money left on the table by non profit seeking participants... I forgot to include central banks... they are typically the "donkeys" of the FX game.

  7. That's because leverage is huge and you are afraid of being wiped out entirely? I mean, it's very possible that you have the correct view, but the market is temporarily against you. If you have to stop loss and cut out there, then you lose greater and later opportunities, right?

    You mean options on currencies are not very liquid yet? Also I thought if options offer the same leverage compared to FX spot, you will have the same amount of risk of danger, am I right?
  8. srg100