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Figure 9.1 graphically illustrates the forex option breakout strategy. It shows that a breakout above the bought call option or below the bought put option is what we are looking for to benefit from this strategy. If a breakout occurs it can only go in one direction which means that one of the options will increase in value while the other option will decline in value. For example, if the forex price breaks higher the call option will increase in value while the put option will decline in value. With any breakout strategy you are seeking a big enough gain on one side to more than offset the loss you will take on the other, so the bigger the move the better. Let’s look at an example.

Example: AUD/USD option breakout strategy

With the current AUD/USD trading at 1.0150 you have a view that the AUD/USD will break out from its current range within the next month and you wish to profit from this move. Not knowing which direction it will move you put on the following option breakout strategy:

• Buy AUD$100,000 1.0300 call option @ 0.0075 (US$750) ↑

• Buy AUD$100,000 1.0000 put option @ 0.0075 (US$750) ↓

Total outlay = 0.0150 points or US$1,500 per AUD$100,000 exposure

Figure 9.2 shows a profit and loss scenario at expiry. The maxi mum risk is limited to the option premium paid for both the put and the call option. In this example, for an AUD$100,000 position, the risk is 0.0150 points or US$1,500. This would occur if the forex price finished between the two strike prices at expiry. The breakeven point at expiry is arrived at by adding the combined premium paid of 0.0150 points to the call strike, or subtracting the total premium paid from the put option strike price. Between the strike price and the breakeven point losses will be limited at expiry. The closer to the breakeven price at expiry, the lower the loss will be. Outside of these breakeven points unlimited profits are available on both sides of the market.

Forex Option, Breakout Strategy, Forex trading books, books, options, motions, option in motions, fx trader, forex, Nick Katiforis, Billy Macris
FIGURE 9.2: Forex option breakout profit and loss diagram at expiry

 

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