Now,  before we start, and in case you have never traded options before, currency options trading can be as simple or as complex as you wish. I have one or two favourite strategies that I tend to use most of the time, but as with any option, they are an extremely flexible instrument to trade, and their use is really only limited by your imagination. I must also say at this point that I am a little ‘old school’ and prefer vanilla exchange traded options, to those newer exotic options which are now starting to appear. So the strategies I talk about here will mainly be based on vanilla options, but I will highlight opportunities for the exotics as well. So, before we get into strategies, we first need to understand a little more detail on how the currency options are presented on the exchanges, and the underlying contract sizes.

Now first of all, I am aware that many of your reading this will be based all over the world, and not in the UK or US. It really doesn’t matter whether your trading account is in dollars or yen or pounds, these are international options which can be traded from anywhere, however one of the problems you may find are the trading hours. For those of us in the Northern hemisphere this is not an issue, but if you live in the Southern hemisphere this could be a problem for you, so please bear this in mind when considering using currency options in your trading. However the good news is that many exchanges are now moving to 24/7 trading for currency options, so this should become less of an issue in time. Please check with your ECN broker about the trading hours beforehand.

The principle exchange that I use is the ISE which as I said earlier is the largest options exchange. Now if you use an ECN broker such as interactive brokers you will find that orders are routed to the exchange which offers the best execution price for the option you are buying or selling. The principle pairs currently listed on the ISE are as follows, but I do expect this to increase with time, as currency options increase in popularity – I have shown the product code alongside each pair:

  • USD/GBP – BPX
  • USD/CAD – CDD
  • USD/EUR – EUI
  • USD/JPY – YUK
  • USD/AUD – AUX
  • USD/CHF – SFC

Now, before you all rush to contact me and say there is a mistake on the web site, this is how the pairs are presented in the world of currency options on the International Securities Exchange. The base currency is always the US dollar, so for the USD/JPY and the USD/CAD this looks familiar – the GBP/USD and EUR/USD however have been reversed. This is simply for consistency so that the base currency is always the same. What this means for us as currency option traders, is that options in the GBP/USD and EUR/USD will be inverted as shown below :

  • GBP/USD – 2.00          USD/GBP – 0.50
  • EUR/USD – 1.50          USD/EUR – 0.66

So when we start looking at option quotes for the above pairs, they may look a little strange to us initially. Now just to confuse you still further, if you look at the CME exchange and their quotes, they are the other way round, so the GBP/USD will be quoted as such, but the USD/JPY will be inverted. (They have recently introduced an excellent  and free  live data service which shows the pairs quoted side by side in the futures market, which I’m sure will transfer to the options side in due course.)

Now with regard to the contract size again these will vary from exchange to exchange. On the Philadelphia Exchange, their world currency options are trade sized at 10,000, (a mini lot size) whilst those on the CME are currently sized at 100,000 to 125,000 ( a full lot size), so please check carefully before opening an account and trading! The final point concerns the spread between the bid and the ask prices for the option. This is normally between 5 and 10 pips depending on the market conditions.  Now when we start we only want to be trading in one contract at a time which of course is possible – start small and build up slowly is always my motto! OK, now we understand a little more about how the option contracts are structured and presented to us, let’s have a look at some currency options trading strategies in detail, starting with some simple ones, and then some which are a little more complex.