Overtime – a trading system for the options market

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Volatile Options Trading Strategies

Options trading has two big advantages over almost every other form of trading. One is the ability to generate profits when you predict a financial instrument will be relatively stable in price, and the second is the ability to make money when you believe that a financial instrument is volatile.

When a stock or another security is volatile it means that a large price swing is likely, but it’s difficult to predict in which direction. By using volatile options trading strategies, it’s possible to make trades where you will profit providing an underlying security moves significantly in price, regardless of which direction it moves in.

There are many scenarios that can lead to a financial instrument being volatile. For example, a company may be about to release its financial reports or announce some other big news, either of which probably lead to its stock being volatile. Rumors of an impending takeover could have the same effect.

What this means is that there are usually plenty of opportunities to make profits through using volatile options trading strategies. On this page, we look at the concept of such strategies in more detail and provide a comprehensive list of strategies in this category.

What are Volatile Options Trading Strategies?

Quite simply, volatile options trading strategies are designed specifically to make profits from stocks or other securities that are likely to experience a dramatic price movement, without having to predict in which direction that price movement will be. Given that making a judgment about which direction the price of a volatile security will move in is very difficult, it’s clear why such they can be useful.

There are also known as dual directional strategies, because they can make profits from price movements in either direction. The basic principle of using them is that you combine multiple positions that have unlimited potential profits but limited losses so that you will make a profit providing the underlying security moves far in enough in one direction or the other.

The simplest example of this in practice is the long straddle, which combines buying an equal amount of call options and put options on the same underlying security with the same strike price.

Buying call options (a long call) has limited losses, the amount you spend on them, but unlimited potential gains as you can make as much as price of the underlying security goes up by. Buying put options (a long put) also has limited losses and almost unlimited gains. The potential gains are limited only by the amount which the price of the underlying security can fall by (i.e. its full value).

By combining these two positions together into one overall position, you should make a return whichever direction the underlying security moves in. The idea is that if the underlying security goes up, you make more profit from the long call than you lose from the long put. If the underlying security goes down, then you make more profit from the long put than you lose from the long call.

Of course, this isn’t without its risks. If the price of the underlying security goes up, but not by enough to make the long call profits greater than the long put losses, then you’ll lose money. Equally, if the price of the underlying security goes down, but not by enough so the long put profits are greater than the long call losses, then you will also lose money.

Basically, small price moves aren’t enough to make profits from this, or any other, volatile strategy. To reiterate, strategies of this type should only be used when you are expecting an underlying security to move significantly in price.

List of Volatile Options Trading Strategies

Below is a list of the volatile options trading strategies that are most commonly used by options traders. We have included some very basic information about each one here, but you can get more details by clicking on the relevant link. If you require some extra assistance in choosing which one to use and when, you may find our Selection Tool useful.

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We have briefly discussed the long straddle above. It’s one of the simplest volatile strategies and perfectly suitable for beginners. Two transactions are involved and it creates a debit spread.

This is a very similar strategy to the long straddle, but has a lower upfront cost. It’s also suitable for beginners.

This is best used when your outlook is volatile but you think a fall in price is the most likely. It’s simple, involves two transactions to create a debit spread, and is suitable for beginners.

This is basically a cheaper alternative to the strip straddle. It also involves two transactions and is well suited for beginners.

You would use this when your outlook is volatile but you believe that a rise in price is the most likely. It is another simple strategy that is suitable for beginners.

The strap strangle is essentially a lower cost alternative to the strap saddle. This simple strategy involves two transactions and is suitable for beginners.

This is a simple, but relatively expensive, strategy that is suitable for beginners. Two transactions are involved to create a debit spread.

This more complicated strategy is suitable for when your outlook is volatile but you think a price rise is more likely than a price fall. Two transactions are used to create a credit spread and it is not recommended for beginners.

This is a slightly complex strategy that you would use if your outlook is volatile but you favour a price fall over a price rise. A credit spread is created using two transactions and it is not suitable for beginners.

This is an advanced strategy that involves two transactions. It creates a credit spread and is not recommended for beginners.

This is an advanced strategy that is not suitable for beginners. It involves two transactions and creates a credit spread.

This complex strategy involves three transactions and creates a credit spread. It isn’t suitable for beginners.

This advanced strategy involves four transactions. A credit spread is created and it isn’t suitable for beginners.

This is a complex trading strategy that involves four transactions to create a credit spread. It isn’t recommended for beginners.

There are four transactions involved in this, which create a debit spread. It’s complex and not recommended for beginners.

This advanced strategy creates a debit spread and involves four transactions. It isn’t suitable for beginners.

This is a complex trading strategy that is not suitable for beginners. It creates a debit spread using four transactions.

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As a trader you will know what an Forex (FX) trading system is. You might have already encountered some of them, but perhaps you are still unsure how to identify which trading systems look like scams, aimed at personal finances. This article will provide you with an explanation of how to find the best Forex trading system that actually works!

What is a Trading System?

A trading system is a group of specific parameters that define entry and exit points for a given equity. In turn, those points, also known as signals, are frequently marked on a chart in real time, and trigger the immediate execution of a trade. There are advantages as well as disadvantages of adopting a trading system. Starting off with the positive points, here are some of the benefits:

  • Emotions are completely excluded
  • They can save a lot of time
  • It is easier to let others do it for you

However, nothing is perfect, and that is why trading systems have drawbacks – and no Forex online trading system is an exception. First of all is the issue of complexity. Trading systems require a solid comprehension of technical analysis, and a knowledge of how parameters work to make decisions. Then you have to be able to make realistic suppositions, and then effectively employ the system. The last drawback is that the development of the system can consume a lot of your time.

The Importance of Developing a Custom System

The foreign exchange market never stands in the same place for a long time. The different systems available are able to sustain significant changes over time – they only work well for a certain period, and if not updated, become useless. Simply put, there is no best Forex trading system in the world.

Thus, being able to make changes to systems is vital, because a developer’s task is to adjust their system in order to meet all major market changes. It is the only way that a system can exist, and remain useful to traders in the future. By developing your own trading system, you will not only create something unique, but if you consider the previously mentioned facts, you will also make something that will suit your personal style of trading.

There may be a lot of traders that are looking for something that you might implement – and therefore your own system could turn out to be very useful. You could even end up creating a good Forex trading system for beginners.

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Examples of Different Trading Systems

We would now like to exemplify three trading systems based on certain conditions and facts that you should consider. Those Forex currency trading systems include:

  • Geopolitical turmoil and Forex trading
  • Trading candlestick patterns with moving averages
  • Stochastic and EMA scalping strategy for the USD/JPY currency pair

Geopolitical Turmoil and Forex Trading

There is always something that can impact the FX markets more than macroeconomic indicators, press conferences of central banks, or speeches by their governors. It is powerful, due to being unpredictable, and it strikes when least expected. Geopolitical conflicts are a mighty driving force, which you do not want to witness as a trader, or as an investor.

The point of this proven Forex trading system is in your main task. You should observe all the events occurring in the world, carefully evaluating them while trying to predict the future consequences of new events that may come to light. We would also like to exemplify the Crimea conflict. The local currencies of Ukraine and Russia were the first to be seriously affected.

The UAH and the RUB were falling to record lows in front of the USD prior to the central banks taking action, and eventually raising the official interest rate. The next victim is of course the local stock market. For instance, the Russian capital market index, which is the RUS50, dropped close to 12% in one day after tensions escalated quickly, and the US threatened the Russian Federation with economic sanctions.

European capital markets and the EUR currency can potentially be affected too. It is geographically connected with Ukraine – and the European economy will suffer if a Russian intervention in Ukraine occurs. It can sound a little bit exaggerated, but do not underestimate how quickly conflicts can spread. Even if the US stock markets are much less vulnerable, there is no assurance that any war will not touch the US.

Fortunately, nothing like that has happened yet, and we should hope for the best. Having said that, you should understand the reasons we give for this Forex currency trading system. Although geopolitical unrest hurts most financial instruments, there are some instruments that gain from this kind of political disturbance. Safe haven assets – which include the JPY, the Swiss Franc, Silver, Gold, and USD.

What is the point we are trying to make by connecting these factors in a Forex trading system that works? Quite simply, if you don’t plan to monitor the currency pairs connected with a certain conflict, then do not involve yourself with such uncertainty. But if you desire to trade, you should buy before something happens locally or globally, and accordingly sell when something has already happened, and when the aftermath is clearly seen.

This is how you can take advantage of the powerful volatility that geopolitical conflicts generate for a number of financial instruments.

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Trading Candlestick Patterns with Moving Averages

It may not be the best Forex system, but let us get to the point. There are a lot of MA variations, but the most popular type are Simple Moving Averages (SMA). In fact, it is the simple average of a security’s price over a determined period of time. It’s the Exponential Moving Average (EMA) that gives bigger weight to more recent prices.

Let’s take a look at this trading strategy. We would like to suggest that you try combinations near the following number of periods: 7, 21, 30, 50, 100 and 200. The moment you have found a MA that works best on a concrete instrument, you will then simply need to hunt for candlestick patterns which emerge around the MA.

This is a very easy-to-use currency trading system that can be quickly utilised, although we recommend testing it out on a demo trading account, and then practicing thoroughly to gain the best understanding and comprehension. The MA which you will apply in your trading should be tuned to produce better results – and the candlestick pattern should meet the necessary theoretical features for a higher probability of success.

Make sure you use money management alongside your trading strategy. You may also require stop-losses to protect your account in case you lose some trades. Do not underestimate the Forex market – even the best systems can produce losing trades from time to time. So be careful and attentive with this FX system.

Stochastic and EMA Scalping Strategy for USD/JPY

Scalping can be an effective way to make a potentially fast return on your investment, particularly if you do not have much time to spend in front of your PC. The strategy implies the usage of a slow EMA and a default Stochastic, which is relatively faster than the EMA on a one minute USD/JPY chart. But why USD and JPY?

*The example below is solely for information purposes and is not to be construed as an offer to buy or sell or trade in any CFDs.

This currency pair may give us the best results. This is one more reason why this is an accurate Forex trading system. This Forex pair is characterised by medium volatility and risk, which makes it perfect to be used with a scalping strategy. So firstly, we may use a 224 EMA on just a 1 minute time frame. In turn, the slow EMA sets the determined trend, and we may use it as a support line, thus betting on a bounce after the price consequently hits it. Besides this, we use a Stochastic (14, 3, 3) on a 1 minute chart as well.

Since our suggested Stochastic is default, it provides pretty good signals. Therefore we are looking for oversold and overbought signals at the time the price touches the EMA. To filter with even more increased efficiency, we look for Candlestick patterns as well, to raise the possibility for a good entry. We have exemplified only an uptrend, but the system works on a downtrend with the same profit. This is another effective online Forex trading system.

Conclusion

We have given three examples of different trading systems or strategies, that depend on certain factors. In case you decide to create your own one professional Forex trading system, consider the factors and situations occurring in the Forex market. Additionally, a full understanding of the technical element of the system is needed to create a high-quality product. As you can see, choosing a good trading system, or creating your own is a complicated task. It depends on how much time you are ready to devote to the challenge and what your expectations are.

If you would like to learn more about Forex trading systems, make sure to read the following related articles:

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Trading FX options

An FX option (foreign exchange option or currency option) is a financial derivative that gives the right, but not the obligation, to buy or sell a currency pair at a set price (called the strike price) on a specified date (called the expiry date).​

A call option gives you the right to buy, a put option gives you the right to sell.

FX options are, for the most part, fundamentally driven by the same factors that drive the underlying currency pairs, such as interest rates, inflation expectations, geopolitics and macroeconomic data such as unemployment, GDP, consumer and business confidence surveys.

There are two styles of options; European and American. The European-style option can only be exercised on the expiry date. The American-style option can be exercised at the strike price, any time before the expiry date.

Please note CMC Markets does not provide the ability to trade FX Options, this information is for educational purposes only.

How are FX options traded?

FX option traders can use the ‘Greeks’ (Delta, Gamma, Theta, Rhio and Vega) to judge the risks and rewards of the options price, in the same way as you would equity options.

The risk for an option buyer is limited to the cost of buying the option, called the ‘premium’. An option buyer has theoretically unlimited profit potential. Conversely, for an option seller the risk is potentially unlimited, but the profit is fixed at the premium received.

Access to FX options

FX option contracts are typically traded through the over-the-counter (OTC) market so are fully customisable and can expire at any time. In the spot options market, when you buy a ‘call’, you also buy a ‘put’ simultaneously. For example, a trader might buy an option for the right to purchase one lot of EUR/USD at 1.00 (or parity) in three months. This is a ‘EUR call/USD put’.

FX options are also available through regulated exchanges which are options on FX futures, in which case it is simply a call or a put. These offer a multitude of expirations and quoting options with standardised maturities. When traded on an exchange, FX options are typically available in ten currency pairs, all involving the US dollar, and are cash settled in dollars.

Why trade FX options?

One of the most common reasons for using FX options is for short-term hedges of spot FX or foreign stock market positions. For example, if you were buying EUR/USD but you thought there might be a short-term decline in the price, you could also buy a euro put option to profit from the decline while maintaining your buy. You could also sell EUR/USD short at the same time as buying.

There are many bullish, bearish and even neutral strategies that can be implemented with options contracts. Spread strategies that are used in equity options can also be used with FX options, including vertical spreads, straddles, condors and butterflies.

An FX option can either be bought or sold. Options prices are derived from the base currency, which is the first currency in the currency pair (eg euros in EUR/USD). If you are bullish on the base currency then you should buy calls or sell puts, conversely if you are bearish you should buy puts or sell calls.

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