Forex Options Greeks

What are forex options greeks? Forex options are calculated with 'Greeks'. A basic explanation of these 'Greeks' will help you understand how and why the forex options move and behave in a certain way. As I had said in my previous post, Forex Options Trading is one of the best ways for wealth creation. The good thing with forex options is that they allow you to control a large amount of currency with a small investment called options premium. You pay the premium to buy forex options. So how much you lose if the anticipated price action does not takes place: only the small premium.

This makes forex options very powerful tools in your trading arsenal. If you can see a trend developing in a currency, you can use forex options to make windfall profits with that trend. This is what George Soros had done in 1992 when he betted heavily on British Pound (GBP) losing its value using forex options and broke the Bank of England. He had made more than $1 Billion profit in a few days with forex options on GBP and Deutsche Marks. Warren Buffet is also known to trade in forex options from time to time when the time is opportune. Forex options trading coupled with forex spot trading can be a powerful combination. The same things apply when you do the technical analysis for both.

A forex option is a derivative whose value depends on the underlying currency pair and how it's value is derived is from a formula that combines these Greeks together. The Greeks are how these options respond to various factors such as price movement, time decay, volatility, and interest rates. There are 5 Greeks involved and we go through them one by one.

Forex Options Non Direction Trading

Delta: The speed of the forex option's price gain or loss against the gain or loss of the underlying currency is known as the Delta. The Delta is a figure that shows us how fast or slow the forex option will move relative to the underlying currency. A Delta of 1 means the forex option price is moving at the same speed and direction as the underlying currency. A Delta of -1 means the option price is moving in the opposite direction for every point the underlying currency moves. In simple terms, Delta tells how much forex options premium changes in pips with the change in the currency pair pips.

Forex Options Non Direction Trading

The probability of a forex option expiring in-the-money is also expressed in the Delta. An at the money forex call option has a Delta of 0.5; i.e., 50%, meaning a 50% chance of expiring in the money. A deep in the money call will have a Delta of near 1, or 100%, meaning a near 100% chance of expiration in the money. A very out-of-the-money call option will have a Delta of close to zero, meaning a near zero chance of expiring in the money.

Forex Options Non Direction Trading

Gamma: Gamma is derived from Delta is the odds of a change in Delta. It also informs in advance if the Delta could be changing. Gammas are positive for both the call and put options. When forex options are deep in the money or deep out of the money, the Gammas will be near zero as the probability of a change in Delta are very low. Likewise at strike price the Gamma would likely to
be the highest.

Forex Options Non Direction Trading

Theta: Time decay is reflected in the forex option price as Theta. Forex Options bought have negative Theta, which means that each day you do not sell that option, the time value is declining because of the time decay. In this case, time decay is making it worse for the buyer of the option, the forex option is losing its value. When you sell forex options, Theta is positive, meaning that time decay is good for the forex option seller.

Forex Options Non Direction Trading

Vega: How volatility affects the forex option pricing is reflected in Vega. In other words, its sensitivity to volatility. Forex Options tend to have price increases when the underlying currency's volatility increases. In this case, volatility is good for the buyer of a forex option and bad for the seller of a forex option. Vega is positive for long forex option and negative for short forex option.

Rho: Rho is how interest rates affect the pricing of the the forex option. When interest rates are high and it is good for the position, Rho will be positive. If interest rates are high but bad for the forex option position, Rho will be negative.

Forex Options Non Direction Trading

The proliferation of online brokerage firms combined with low commission costs has empowered the average retail investor to navigate the options market like never before. Despite their reputation for being risky and difficult to master, forex options can present a unique advantage to the individual trader. They provide increased cost efficiency and are not as risky as equities. Forex Options can also offer higher percent returns than stocks and strategic alternatives.