FX Futures and FX OptionsPhilip Lau
Managing PartnerYaozhi Asset Management International Co. Limited
2 September 2020
What are FX Futures Contracts
They are standardized contracts to buy or sell a currency at a set price, on a set date in the future, in predefined quantity and quality
Major CME FX Contract SpecificationsEUR/USD JPY/USD GBP/USD AUD/USDProducts Euro Japanese Yen British Pound Australia DollarProduct Symbols 6E 6J 6B 6AContract Size 125,000 euro 12.5 million yen 62,500 pounds 100,000 Australia
dollarExpirations Quarterly, monthly Quarterly, monthly Quarterly, monthly Quarterly, monthly
Minimum Tick Size 0.00005 per euro increment
0.0000005 per yen increment
0.0001 per pound increment
0.0001 per AUD increment
Dollar value of a Tick
$6.25 $112.50 $6.25 $10.00
Trading Hour Sun – Fri 5:00pm to 4:00pm CT with a 60-minute break each day beginning at 4:00pm CT
Examples of FX futures contracts traded on the CME
Pay-off of FX Futures ContractProfit and loss of FX futures contract is a straight line
-0.0800
-0.0600
-0.0400
-0.0200
0.0000
0.0200
0.0400
0.0600
0.0800
1.1000 1.1200 1.1400 1.1600 1.1800 1.2000 1.2200 1.2400 1.2600
Pay Off – Long EUR Dec Futures at 1.1800
Benefits of Trading FX Futures and Options on CME
BENEFIT FUTURES24-Hour Access YesCentralized, Transparent Marketplace Yes
Everyone sees same prices, quotes, trades volumesAdditional Finance Cost No
All prices are built into spreadConflict of Interest No
Futures broker is intermediary only; commission-basedSafety & Security Yes
All trades are backed by CME Group, with risk shared among clearing membersLiquidity You Can Count On Yes
$100B in daily CME FX liquidityOver $1 quadrillion traded at CME Group annually
Availability by Regulation YesCFTC-regulated market available in over 150 countries
Standardized Contract YesCertainty of size, quantity, date, etc. promotes greater trading certainty
Leveraged/Margin Trading Yes
What is FX Option on Futures Contract
• An FX option on a futures contract is the right, but not the obligation, to buy or sell the underlying FX futures contract at a predetermined price on a given date in the future
• When you buy an option on a futures contract, you pay an upfront premium, and agree to buy that FX futures contract at a specific price
• You have the right but not the obligation to exercise your option at that price and receive the FX futures contract. If price moves against you, you have the option of not exercising the contract
• Every option transaction must have a buyer and a seller
• Buyers pay the premium to the seller, and sellers hold the risk of price movement
Key FX Options Elements
Underlying• The deliverable is a FX futures contract and is called the “underlying instrument” or the “underlier”• These could be 6E (euro), 6J (yen) or any FX futures contract traded on the CME
Expiration/Maturity date• Each FX option has its own expiration or maturity date• This is the last day on which an FX option can be exercised into the underlying FX futures contract• After the expiration or maturity date, the option contract will cease to exist; the buyer cannot exercise the option and the seller has no obligation• FX options can have a variety of option expiration dates, giving traders the flexibility to find a product that meets their trading needs• Options expire into the nearest quarterly futures underlying contract
Key FX Options Elements
Strike price• This is the agreed price at which a transaction will happen if the FX option is worth exercising• The strike price for the FX option contract will determine the value at expiration
Option types• FX Option contracts fall into two categories, call options and put options
What are FX Options on Futures Contracts
There are serial and weekly FX options contracts traded on CME for major currencies.
Serial FX options contracts expire in March quarterly cycle plus eight serial months
Major CME FX Contract SpecificationsEUR/USD JPY/USD GBP/USD AUD/USDContract Unit 125,000 Eur 12,500,000 Japanese Yen 62,500 British pounds 100,000 Australia dollar
Minimum Price Fluctuation
0.0001 per Eur increment = $12.50
0.00005 per Eur increment for premium below 0.0005 = $6.25
0.000001 per Japanese yen increment = $12.50
0.0000005 per Japanese yen increment for premium 0.000005 = $6.25
0.0001 per British pound increment = $6.25
0.0001 per AUD increment = $10.00
0.00005 per AUD increment for premium below 0.0005 = $5.00
Product Code EUU JPU GBU ADU
Listed Contracts Four (4) months in the March quarterly cycle (Mar, Jun, Sep, Dec) plus eight (8) serial months
Settlement Procedure Physical – Exercise into futures
Termination of Trading Trading terminates at 9:00 am CT on the second Friday prior to the third Wednesday of the contract month
Trading Hour CME Globex: Sun – Fri 5:00pm to 4:00pm CT with a 60-minute break each day beginning at 4:00pm CT
Exercise Style European Style. Auto-exercise against CME Group FX Fixing Price.
Underlying Euro FX Futures Japanese Yen Futures British Pound Futures Australia Dollar Futures
Examples of Serial FX Options traded on the CME
What are FX Options on Futures Contracts
There are serial and weekly FX options contracts traded on CME for major currencies. Weekly FX options contracts expire on Monday, Wednesday and Friday for 4 consecutive weeks
Major CME FX Contract SpecificationsEUR/USD JPY/USD GBP/USD AUD/USDContract Unit 125,000 Eur 12,500,000 Japanese Yen 62,500 British pounds 100,000 Australia dollar
Minimum Price Fluctuation
0.0001 per Eur increment = $12.50
0.00005 per Eur increment for premium below 0.0005 = $6.25
0.000001 per Japanese yen increment = $12.50
0.0000005 per Japanese yen increment for premium 0.000005 = $6.25
0.0001 per British pound increment = $6.25
0.0001 per AUD increment = $10.00
0.00005 per AUD increment for premium below 0.0005 = $5.00
Product Code MO1, MO2, MO3, MO4, MO5 MJ1, MJ2, MJ3, MJ4, MJ5 MB1, MB2, MB3, MB4, MB5 MA1, MA2, MA3, MA4, MA5
Listed Contracts Weekly contracts listed for 4 consecutive weeks
Settlement Procedure Physical – Exercise into futures
Termination of Trading Trading terminates at 9:00 am CT on Monday of the contract week
Trading Hour CME Globex: Sun – Fri 5:00pm to 4:00pm CT with a 60-minute break each day beginning at 4:00pm CT
Exercise Style European Style. Auto-exercise against CME Group FX Fixing Price.
Underlying Euro FX Futures Japanese Yen Futures British Pound Futures Australia Dollar Futures
Examples of Weekly Monday FX Options traded on the CME
Example of Price Quotes for AUD Futures Option on the CME
Date: Aug 11, 2020
Prices: Closing price
Underlying: Dec 14, 2020 AUD futures contract, close at 0.7128
Expiration date: Oct 9, 2020
Strike Price Call Premium Put Premium0.69000 0.02910 0.003700.69500 0.02500 0.004600.70000 0.02120 0.005800.70500 0.01770 0.007300.71000 0.01450 0.009100.71500 0.01170 0.011300.72000 0.00920 0.013800.72500 0.00720 0.016800.73000 0.00550 0.020100.73500 0.00420 0.023800.74000 0.00320 0.027800.74500 0.00240 0.032000.75000 0.00180 0.03640
Call Option
• A call option is the right to “buy” the underlying product at a predetermined price
• Call Buyers have protection in that their risk is limited to the premium they must pay for the call option
• The maximum risk of a call option buyer is the premium paid
• Call sellers will profit if the futures price does not increase beyond the value of the premium received from the buyer
Buy FX Call Option
Market situation: UK economy has been doing very badly and British Pound has been dropping
Your assessment: The market may go up and you do not want to miss the chance to profit but you are afraid that it may go down further
Your decision: Buy British Pound call option on future
Current Date: Aug 7, 2020
Dec future price: 1.3056
Option expiration: Oct 8. 2020
Strike: 1.3200
Premium paid: 0.0129
-0.0200
-0.0100
0.0000
0.0100
0.0200
0.0300
0.0400
0.0500
0.0600
0.0700
0.0800
1.2400 1.2600 1.2800 1.3000 1.3200 1.3400 1.3600 1.3800 1.4000 1.4200
Pay Off - Long British Pound Call Strike 1.3200
breakeven at 1.3329
Sell FX Call Option
Market situation: UK economy has been doing very badly and British Pound has been dropping
Your assessment: The market is still weak and any rebound would be limited. GBP will be trading in a range with slight bearish tone
Your decision: Sell British Pound call option on future
Current Date: Aug 7, 2020
Dec future price: 1.3056
Option expiration: Oct 8. 2020
Strike: 1.3200
Premium received: 0.0129
-0.0800
-0.0700
-0.0600
-0.0500
-0.0400
-0.0300
-0.0200
-0.0100
0.0000
0.0100
0.0200
1.2400 1.2600 1.2800 1.3000 1.3200 1.3400 1.3600 1.3800 1.4000 1.4200
Pay Off - Short British Pound Call Strike 1.3200
breakeven at 1.3329
Put Option
• A put option is the right to “sell” the underlying product at a predetermined price
• Buyers of the put have some protection against adverse price movements in that they have limited risk
• The maximum risk of a put option buyer is the premium paid• Sellers of put options collect premium and accept the risk they may have the
underlying “put” into their account resulting in a long futures position, a position that might be at a price much higher than is currently trading in the market
Buy FX Put Option
Market situation: UK economy has been doing very badly and British Pound has been dropping
Your assessment: The market is going to go down further. The market is oversold and there may be rebound but you do not want to miss the chance
Your decision: Buy British Pound put option on future
Current Date: Aug 7, 2020
Dec future price: 1.3056
Option expiration: Oct 8. 2020
Strike: 1.2900
Premium paid: 0.0125-0.0200
-0.0100
0.0000
0.0100
0.0200
0.0300
0.0400
0.0500
0.0600
0.0700
0.0800
1.2000 1.2200 1.2400 1.2600 1.2800 1.3000 1.3200 1.3400 1.3600
Pay Off - Long British Pound Put Strike 1.2900
breakeven at 1.2775
Sell FX Put Option
Market situation: UK economy has been doing very badly and British Pound has been dropping
Your assessment: All negative factors have been factored and you do not mind to buy at 1.29. At the same time, you do not think that the upside is significant
Your decision: Sell British Pound put option on future
Current Date: Aug 7, 2020
Dec future price: 1.3056
Option expiration: Oct 8. 2020
Strike: 1.2900
Premium received: 0.0125
-0.0800
-0.0700
-0.0600
-0.0500
-0.0400
-0.0300
-0.0200
-0.0100
0.0000
0.0100
0.0200
1.2000 1.2200 1.2400 1.2600 1.2800 1.3000 1.3200 1.3400 1.3600
Pay Off - Short British Pound Put Strike 1.2900
breakeven at 1.2775
Factors Affecting Option Price
Moneyness – ITM, ATM, OTM
• Moneyness is a term to describe whether a contract is either “in the money”, “out of the money”, or “at the money”
• A call option is said to be “in the money” when the future contract price is above the strike price. A call option is “out of the money” when the future contract price is below the strike price
• For a put option, the contract is said to be “in the money” when the future contract price is below the strike price, and “out of the money” when it is above the strike price.
• The term “at the money” refers to the strike that is closest to the underlying futures contract.
• When an option is in the money it is said to have intrinsic value, and when the contract is out of the money it has no intrinsic value.
Factors Affecting Option Price
The value of an option is comprised of two parts, the intrinsic value and the time value. When added together, they give you the “option value”
Option Value = Intrinsic Value + Time Value
When an option contract expires, the time value would be zero
At this point the option value is equal to the intrinsic value
Option Value = Intrinsic Value + 0
In the money At the money Out of the money
Intrinsic value Positive zero zero
Long Expiration Date
Short Expiration Date
High Volatility Low Volatility
Time value High Low High Low
Options Greeks
Delta
• Delta is the change in the option’s price or premium due to the change in the Underlying futures price
• For example, if the delta is 30, then a change in 1% of the underlying implies a change of 0.3% (roughly) of the option premium
Gamma
• Gamma is the change in delta due to the change in the underlying futures price
• Think of gamma as the delta of the delta
• Gamma is the highest when the option is at the money
Options Greeks
Theta
• The Greek that measures an option’s sensitivity to time is theta
• Theta is usually expressed as a negative number
• Theta is highest for at-the-money (ATM) options and lower the further out-the-money or in-the-money the option is
Vega• The Greek that measures an option’s sensitivity to marketvolatility
• Vega is the highest when the underlying price is near the option’s strike price
• Vega declines as the option approaches expiration
• The more time to expiration, the more Vega in the option
Option Strategy - Straddle
• If you are buying a straddle, it is referred to as being long the straddle
• A trader buys the call and the put of the same strike, same expiration and same underlying product
• Traders will buy the straddle if they expect the market to start moving but are not sure which way
• Traders will sell a straddle, or short the straddle, when they expect the market is going to stagnate
• Like the long straddle the straddle’s break-even points are at the strike plus the cost of straddle on the call side and the strike minus the cost of the straddle on the put side at expiration
Buy FX Option Straddle
Market situation: Japan market has been quiet lately. There has been no special news and the market is trading in a narrow range
Your assessment: With the growing geopolitical tension, you expect that there is high probability of some military conflicts. Volatility is going to shoot up.
Your decision: Buy JPY straddle
Current Date: Aug 7, 2020
Dec future price: 0.009450
Option expiration: Oct 8. 2020
Strike: 0.009450
Call premium: 0.000110
Put premium: 0.000106
Total Premium paid: 0.000216-0.000300
-0.000200
-0.000100
0.000000
0.000100
0.000200
0.000300
0.000400
0.000500
0.008600 0.008800 0.009000 0.009200 0.009400 0.009600 0.009800 0.010000 0.010200
Pay Off - Buy Oct JPY Straddle Strike 0.009450
breakeven 0.009244
breakeven 0.009656
Sell FX Option Straddle
Market situation: Japan market has been quiet lately. There has been no special news and the market is trading in a narrow range
Your assessment: Despite all the news about potential conflicts, it will settle down very soon and the market will continue to trade in a range
Your decision: Sell JPY straddle
Current Date: Aug 7, 2020
Dec future price: 0.009450
Option expiration: Oct 8. 2020
Strike: 0.009450
Call premium: 0.000110
Put premium: 0.000106
Total Premium received: 0.000216 -0.000500
-0.000400
-0.000300
-0.000200
-0.000100
0.000000
0.000100
0.000200
0.000300
0.008600 0.008800 0.009000 0.009200 0.009400 0.009600 0.009800 0.010000 0.010200
Pay Off - Sell Oct JPY Straddle Strike 0.009450
breakeven 0.009244
breakeven 0.009656
Option Strategy - Strangle
• In a long strangle, the trader buys a call and put of different strikes, the same expiration and the same underlying product
• You may note the similarity to a straddle, but the difference is that with a strangle, the call and the put are different strikes versus the same strike used in a straddle
• Cost of buying a strangle is lower than straddle because both call and put strike prices are out of the money (OTM)
• Traders will sell a strangle when they expect the market is going to stagnate
• Because the traders are short the strangle, they profit as the options decay
• Selling a strangle receives smaller premium than straddle but the range covered is wider, therefore lower risk for the seller
Buy FX option strangle
Market situation: Japan market has been quiet lately. There has been no special news and the market is trading in a narrow range
Your assessment: With the growing geopolitical tension, you expect that there is high probability of some military conflicts. JPY will breakout from the current trading range
Your decision: Buy JPY strangle
Current Date: Aug 7, 2020
Dec future price: 0.009450
Option expiration: Oct 8. 2020
Call strike: 0.009650
Put strike: 0.009250
Call premium: 0.000048
Put premium: 0.000031
Total Premium paid: 0.000079-0.000200
-0.000100
0.000000
0.000100
0.000200
0.000300
0.000400
0.000500
0.008600 0.008800 0.009000 0.009200 0.009400 0.009600 0.009800 0.010000 0.010200 0.010400
Pay Off - Buy Oct JPY Strangle Strikes 0.009250 and 0.009650
breakeven 0.009729
breakeven 0.009171
Sell FX option strangle
Market situation: Japan market has been quiet lately. There has been no special news and the market is trading in a narrow range
Your assessment: There may be short-term volatility. However, it will settle down very soon and the market will continue to trade in a range.
Your decision: Sell JPY strangle
Current Date: Aug 7, 2020
Dec future price: 0.009450
Option expiration: Oct 8. 2020
Call strike: 0.009650
Put strike: 0.009250
Call premium: 0.000048
Put premium: 0.000031
Total Premium received: 0.000079-0.000500
-0.000400
-0.000300
-0.000200
-0.000100
0.000000
0.000100
0.000200
0.008600 0.008800 0.009000 0.009200 0.009400 0.009600 0.009800 0.010000 0.010200 0.010400
Pay Off - Sell Oct JPY Strangle Strikes0.009250 and 0.009650
breakeven 0.009729
breakeven 0.009171
Option Strategy – Covered Call
• The covered call strategy consists of a long futures contract and a short call on that futures contract
• The call can be in-, at- or out-of-the-money
• Covered calls are executed as an income-generating strategy when the futures contract holder expects the market to remain stable
• The trader foregoes some of the up-side potential of the futures position in return for the premium received from the sale of the call
EUR Covered Call
Market situation: EUR has been going up but the momentum is slowing down. One of the reasons is the strong US capital market that attracts some flows from Europe to the US
Your assessment: With the economy in Europe will be stronger than the US, the long-term bullish trend is intact. The outflow is only short-term
Your decision: Keep the long Dec EUR future contract (cost 1.1800) and sell OTM Eur call option
Current Date: Aug 7, 2020
Dec future price: 1.1795
Option expiration: Oct 8. 2020
Call strike: 1.2000
Call premium received: 0.0079-0.0700
-0.0600
-0.0500
-0.0400
-0.0300
-0.0200
-0.0100
0.0000
0.0100
0.0200
0.0300
0.0400
1.1000 1.1200 1.1400 1.1600 1.1800 1.2000 1.2200 1.2400
Pay Off - Eur Covered Call
EUR Covered Call
• Total pay off is the summation of the pay off of the futures and the call option contracts
• The trader gives up the upside if the market goes up
• Return is enhanced if the market is below 1.2079
-0.0800
-0.0600
-0.0400
-0.0200
0.0000
0.0200
0.0400
0.0600
0.0800
1.1000 1.1200 1.1400 1.1600 1.1800 1.2000 1.2200 1.2400 1.2600
Pay Off - Eur covered call
Total Payoff option Pay Off Futures Profit
Option Strategy – Collars
• A collar spread consists of a long futures contract, a short call and a long put• The call and put are different strikes. But have the same expiration and the same underlying futures contract
• Traders will collar a futures contract to protect against downside risk of the futures contract
• The long-put leg will protect against downside market movements while the premium received from shorting the call will help finance the purchase of the put
• A collar strategy is used when a trader has a long position in the underlying market and wants to protect that position from downward market movement
• Executing a collar strategy will cover downside risk but cap the upside potential
• It is often referred as ‘risk reversal” in the markets
AUD Collars (Risk Reversal)
Market situation: AUD has rebounded a lot from its low in March. There is uncertainty recently regarding its export momentum due to global slow down of COVID 19
Your assessment: Given the positive market sentiments the AUD may go up some more but not much. However, would like to protect downside risk if market reverses its trend
Your decision: Keep the long Dec AUD future contract (cost 0.7100) and sell OTM AUD call option and buy OTM put option
Current Date: Aug 7, 2020
Dec future price: 0.7160
Option expiration: Oct 8. 2020
Call strike: 0.7300
Call premium received: 0.0062
Put strike: 0.7000
Put premium paid: 0.0066-0.0150
-0.0100
-0.0050
0.0000
0.0050
0.0100
0.0150
0.0200
0.0250
0.6700 0.6800 0.6900 0.7000 0.7100 0.7200 0.7300 0.7400 0.7500 0.7600
Pay Off - AUD Risk Reversal
CME Key FX Statistics 2020
2020 has been an exceptional year for the financial market
We have seen global pandemic, aggressive QE in all major countries, unprecedented fiscal stimulus and great recession
Traders who sought to hedge or put on risk came more to CME products for their liquidity and transparency
Eur/USDTraded $31.1B in notional in H1, equivalent to 219K+ contractsOpen interest was up 12% YTD, at 587,813
Asset Manager
Held 48% of all open interest in EUR/USD
AUD/USD
Traded $7.19B in notional in H1, equivalent to 107,849 contracts. YTD open interest averaged 149,198 contracts
Open Interest
$9B across all Weekly options expires: Monday, Wednesday and Friday
Built For Event Risk
Volume in Monday FX Options Expirations increased by 107% in June over May
EM Pairs
Volume grew to 83K contracts YTD – driven by BRL up 54%, ZAR up 80%, and RUB up 42%
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Thank You
Disclaimer
This material is provided for information only and is not an offer to sell or the solicitation of an offer to buy any financial instrument or asset class.
This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Yaozhi Asset Management International Co. Limited is not affiliated with Interactive Brokers LLC, or any other FINRA broker-dealer.
The information provided in this presentation is believed to be accurate, but the accuracy and completeness of the information is not guaranteed.
Past performance is not indicative of future results.