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> Forex Options Strategy - EUR / USD - OTM Butterfly Spread DEC11
 Forex Options Strategy - EUR / USD - OTM Butterfly Spread DEC11
Issued on October 18 2011 par Gilles
We start a new strategy on EUR/USD options, with Dec, 28th expiry.
It's been a long time I wanted to present a strategy using Forex options.
Taking advantage of a little rest on markets (everything is relative!), I looked for a cheap bet on EUR / USD by the end of 2011. I have no big conviction on what market would do, that is, I don't want to lose or to put at risk a large amount of money. My choice naturally turned out to be a butterfly spreads. I have no strong feeling, so I need to find the cheapest way to use options : an 'Out of The Money' butterfly spread would do that job. I - The situation : After a long hesitation between 1.41 and 1.43, EUR / USD had finally chosen the South, until having reached even 1.3150, before bouncing back up to 1.3910.  Volatility is known to be much less important on Forex as for stocks for example. It might be a little exaggerated. II - The strategy : I have choosen in a arbitrary way a bearish direction on EUR / USD, that means the dollar should strengthen against the EUR to let us make some profits. We've the following quotes :  The butterfly spread is built as it follows: DEC 28 Expiry: ● The purchase of 300000 calls struck at 1.34 for $0.0230 each ( Implied Volatility 16.59% ) hence a debit of $ 6900 ● The short selling of 600000 calls struck at 1.32 for 0.0169 each ( Implied Volatility 16.72% ) hence a credit of $ 10140 ● The purchase of 300000 calls struck at 1.30 for $ 0.0138 ( Implied Volatility 17.86% ) hence a debit of $ 4140 This leads to a Global Net Debit of : $ 900 The largest part of this cost is due to bid / ask spreads. III - P&L : A 3D representation of the expected P&L provides an easy way to grasp how the position wll react according to spot level and time  The risk is clearly limited. Next : Forex Options Strategy - EUR / USD - OTM Butterfly Spread DEC11 (First Update) Gilles |
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