Exploring The Benefits of Listed FX Options - Part Three
CONTINUED FROM PART TWO...
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Vertical Spread Strategies
Options vertical spread strategies can help to mitigate any volatilityrisk. In this current high implied volatility environment, verticalspread strategies are great for entering new FX options positions.
Trading FX Options in a high volatility environment also creates challenges.
Since the cost of options can be relatively high, spread strategies should be
used to implement your specifc FX price forecasts.
Vertical options strategies (buying one option, selling another with the same underlying and same month) can help reduce the overall volatility exposure of the trade. Using
this type of strategy allows you to focus almost exclusively on your price
forecast and timing of the ISE FX pair value. Executing vertical spreads can
help you signifcantly reduce the volatility risk in a specifc trade.
Risk/Reward Tradeoffs
With countless strategies to choose from, FX Options are an extremely
versatile investment instrument and quite similar to options createdthousands of years ago, where they transfer risk from one party toanother. Prior to entering any options transaction, itís imperative to take into account the risk and reward trade-offs. Most important, options enable investors to trade with limited risk.
Buyers of options can only lose the premium paid. Sellers of options can lose substantial amounts, if the market moves against them in a dramatic fashion. In return for this inherent risk, sellers tend to target options premiums. If you have a view of where the U.S. dollar is headed and are looking for additional income, spread strategies will help limit your overall risk.
As many have recently re-discovered, selling options without a hedge can be very risky. With ISE FX Options, investors can create vertical spreads, capping your overall risk. Foreign exchange correlations andimplied volatilities will continue to be dynamic. Keeping in mind therisk/reward trade-off, your choice for the most appropriate options strategy should also be based on your individual fnancial goals. How you determine your forecast and your options strategy is entirely up to you.
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About Steve Meizinger
Steve Meizinger, Director of Education at the International Securities Exchange (ISE), is a leading expert in Forex, equity, and index options trading. As a top rated instructor for ISE and the Options Industry Council, Steve has led thousands of seminars, helping investors navigate the market and identify the most appropriate trading strategies. Steve has over twenty years experience as an Options Specialist at several leading exchanges, including the NYSE, PHLX and AMEX.
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