By David Newman
I spend all day, every day, listening to you. On an average day, I speak to about 45 members…discussing everything from the best jurisdiction for a family foundation to register a yacht, to providing a list of international brokers who can purchase the latest Global Mutual Fund Investor recommendation. I love the variety of questions, and even more I like finding out how The Sovereign Society can help you.
Recently, many of you have asked me the best way to understand and trade currency options…so I put your questions to Jack Crooks, the “Einstein of Currencies.”
DAVID: Jack, let’s start with the basics. What exactly is a currency option, and what makes it different from trading regular currencies?
JACK: A currency option is just a contract that gives the buyer the right to buy or sell currency at a specified price over a certain timeframe. These currency options are great for investors that want to shoot for high returns in the currency market, but want to do so with strictly limited risk. The most you can lose on an options trade is your initial “premium,” or what you paid for the option in the first place. This means you don’t have to constantly watch your account or use complicated stop loss techniques. Plus, you get to invest with relatively low capital. You can start trading options with just US$5,000-US$10,000. That’s a biggie.
DAVID: Is trading a currency option the same as trading an option on a stock?
JACK: Yes, currency options are the same. But instead of tracking a particular stock as the underlying asset, currency options track the price moves of six major currencies. You’re speculating that a currency will rise or fall against the U.S. dollar, and you’re also betting that the value of your option will rise above your purchase price before it expires. And just like with stocks, you can sell your contract at any time prior to expiration date.
The big difference is that in currencies, you can make a lot more money faster due to the size of the currency options contract. You get greater leverage in a currency options contract than in an average stock options contract.
DAVID: Where do you trade currency options? Do you need a spot forex account?
JACK: No, you don’t. You can do it in a regular stock brokerage account, using options listed on the Philadelphia Stock Exchange (PSE). Or if you prefer, you can also trade options on currency futures listed on the Chicago Mercantile Exchange (CME) through a futures brokerage account.
DAVID: What do you need to know to place a currency options trade?
JACK: Once you have singled out a currency that’s poised to make a move, you have the choice of buying either calls or puts. Buying a call means you’re expecting the currency to go up in value against the dollar, while a put means you’re betting a certain currency will go down against the dollar.
Next, you pick the strike price for your option. Without getting too technical, you basically choose the strike price based on how quickly you expect the currency to make its move, and how far you think that move is likely to run. With options, it’s very important to make an accurate judgment on just how long it will take your expected currency move to play out. The volatility of the underlying currency is also an important consideration. Generally speaking, the more the currency is bouncing around, the higher the price of your option.
Finally, you select an expiration month for the currency option you want to trade. The more time you have before your option expires, the more expensive it will be to purchase.
DAVID: Is trading options really as time-sensitive as it sounds? Do you need to sit by your computer each day waiting for your option to go up or down, so you can quickly sell?
JACK: No…for the most part it’s as simple as reading your email every few days. For example, I give my readers the specific parameters to follow for each trade, not only when and what to buy (strike price and expiration), but when to exit the position, too. So it’s pretty straightforward, especially if you have a full-service broker to help you place and execute these trades.
Thanks Jack. If you want more information, you can also contact Jack at editor@sovereignsociety.com with questions or concerns.
David Newman is the Director of Membership Services. He’s available to take any of your questions, 9-5 PM EST, five days a week. You can contact him today at dnewman@sov-soc.com or call him at 1-866-765-7506.