FX Futures and FX Options - interactivebrokers.com...• The maximum risk of a put option buyer is...

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


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




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


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




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


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




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




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


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




Strike: 0.009450



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


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




Call strike: 0.009650

Put strike: 0.009250



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


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




Call strike: 0.009650

Put strike: 0.009250



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




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




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%

CME Trader Tool – Quikstrike®Get the Insights You Need to Make Your Best Trades

• Free pricing and analytics tools for CME Group Markets• Exclusive, web-based tools developed by Quikstrike®, an industry leader of financial

services software• There are four tools by category

o Pricing, Volatility & Strategy Tools – calculate fair values, measures the price sensitivity of CME Group options with the “Greeks”. Track volatility, and test your strategies

o Product & Market Data Tools – Examine historical block trade data, download 12 months of scheduled expirations and find other insights waiting within the data

o Volume & Open Interest Tools – Get a heatmap of the most active strikes and expirations, track positions by customer, compare volume and OI over time

o Single-Asset Class Tools – Compare costs for interest rate futures to OTC instruments, and equity index futures to ETF. Analyse interest rate data and see bitcoin’s pricing history

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.

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