Understanding Options

Discussion in 'Options' started by fastbusiness, Sep 7, 2006.

  1. After reading few pdf books and listening to some explanations I got so confused about fx options. So, I would kindly ask all good people to try to make this little clearer for me. I'll give an example and you just say if I got it right or not.

    Current fx spot rate for gbp/jpj is, let's say, 223.00. I buy call (100.000 units) and set my strike price at 223.00. Option lasts for 1 month. I pay premium of, let's say 1.00. So currently, what I see is that after one month from the date I purchased an option I will be able to buy back 100.000 units at the strike price (in this case 223.00). Let's now say that price has changed and the rate for gbp/jpj is 225.00 at the moment when it expires. That means that I just got 100 pips of profit (225.00 - 223.00 - 1.00 = 1.00 = 100 pips). That's roughly about $860 now. But if price of option, when it expired was 224.00 I would be at the break even point. Another scenario. Price has gone down to 220.00. That would mean that I have not lost anything except my premium (1.00).
  2. 66 views and no replays?! What, you don't know the answer? I would appreciate if you would give me, at least, some directions where I might find the info.
  3. MTE


    Yeah, you got it right.
  4. You've got the security's price effect on the option pretty well right. However, make sure you learn about implied volatility's effect on option prices.

    I trade equity and index options and I've seen call prices stay flat or go down while a security went up. I'd assume the same might go for forex.

    Good luck.
  5. Thanks for the replays. Now I know that I understood that part. Second thing I wanted to check is if the same thing applies for sell call.

    Let's say current fx spot price for gbp/jpj is 219.00. I sell call at the time and pay, let's say, some 1.00 premium. Option lasts for 1 month. Now at the end of options life, price rocketed to 223.00. I wouldn't be in any loss except the premium I paid. But, if price drops to 218.00 I would actually be at the break even point. And if price continues to go down and ends up at the 217.00 level, I would have a 100 pips profit.

    Ok, I used logic here to get to this, but I'm not so sure that this is how it goes. So once again I would like you to correct me if I'm wrong.

    Thanks to all
  6. This is wrong.
    Options on FX are the same as any options. Get a good book and learn learn learn the basics. You'd be a fool to trade options when you have questions like that, even if you get some answers.

    If you sell a call you don't pay 1.00 premium, you receive 1.00. Hence the name 'sell'. When the option goes beyond the strike + 1 you be in a loss. When you had bought the call your profits would be unlimited, so it follows that the sellers' loss is also infinit.
    And reverse, the buyer has limited loss, so the seller has limited profit, being the 1.00 premium you received to begin with.
    Now, read a book!

  7. Now we are getting somewhere. It sounded strange to myself too, but heck, I had to ask :D

    So this would be the situation now.

    Fx spot rate (gbp/jpj) 219.00

    Sell call. Get 1.00. Strike price 219.00. If it goes up 100 pips I'm at break even, if it goes 200 pips up I have 100 pips loss.

    If it goes down to 218.00, I'll have 200 pips profit (100 pips from premium, 100 pips from market movement).

    I think I get it now. But I shall read some good book also.
  8. This still doesn't make sense.

    If you sell a 219 call and it rallies to 220 tomorrow, you will be at a substantial loss, not break even.

    If the market goes down below 219 *by expiration* you'll get to keep 100 pips of premium. You don't make any money from market movement.

    If the market goes down to 218 tomorrow, you will make only a small percentage of those 100 pips.

    On top of that, you need to make sure you're using the right option model--Garman instead of Black-Scholes.
  9. No, at 218 or 200 or 100 you have the same profit: 1.00.
    Look, if you know what buying a call does, then just reverse it when you sell. What you win is what the other guy loses, and vv..

  10. I think I'm getting a point here. So when I buy call option I pay premium. And thats all the loss I can have. Profit is unlimited. And when I sell call option I get premium, but that's just about everything I could possibly gain from the option. If rate is below the strike price, at the moment of expiration, I'll get the premium. But if it's above I'll get loss... but will I get premium too :confused: ? My guess is that I should... Who would like to take a loss and get nothing in return :p. If this is still not correct, it would be nice to some of you post a simple example.
    #10     Sep 8, 2006