Access to foreign exchange trading has opened up exciting trading options for the retail trader. You can now trade alongside corporations and institutions in a highly liquid market that is global, traded around the clock, and highly leveraged. Before jumping into this market, however, we must understand the factors that affect the forex market. With that in mind, STOCKS & COMMODITIES has introduced Forex Focus to better prepare the retail trader to participate in the currency market.
Pay More, Profit More
Paying a higher premium may mean an opportunity for greater profits. Look at this example of the GBP/USD trade.
by Vikram Murarka
IT is an open secret that every corporate hedger wants to pay zero for an option that he buys. Banks oblige by constructing "zero-cost" strategies. The concept of zero-cost structures has become so ingrained in the market psyche that when, at a seminar, we suggested buying call spreads at a cost, an experienced hedger asked, "But aren't call spreads supposed to be zero cost?" No!
Like anyone else, we would love to be able to buy cheap options. However, we are open to the idea of not only paying premium, but also the idea of paying higher premium if there is an opportunity to make greater profits. If this sounds contradictory, perhaps this trade example will illustrate.
IN-THE-MONEY PUT OPTION
The GBP/USD was trading near 1.9690 (Figure 1) on the morning of January
4, 2008, looking to fall toward 1.95 over a one-month period and possibly
toward 1.90 over three to four months. While an eventual fall looked certain,
an interim rally toward 1.98-99 could not be ruled out.
FIGURE 1: FORECASTING BY LOOKING AT CHARTS. Although a fall in the GBP/USD looked pretty certain, an interim rally toward 1.98-99 could not be ruled out. Therefore, the idea was to buy a put option rather than sell a GBP/USD forward.
