World Currency Options Help - Frequently Asked Questions


World Currency Options  >>  Frequently Asked Questions




 

What currency options are traded?

NASDAQ OMX PHLXSM offers U.S. dollar-settled options on the Australian Dollar (XDA), British Pound (XDB), Canadian Dollar (XDC), Euro (XDE), Japanese Yen (XDN), Mexican Peso (XDM), New Zealand Dollar (XDZ), Norwegian Krone (XDV), South African Rand (XEV), Swedish Krona (XEH) and Swiss Franc (XDS).

 

Do I need any special type of trading account or permissions to trade PHLX World Currency Options?

PHLX World Currency Options (WCO) have been structured to be available for trading through any approved options account at a securities broker-dealer. Please consult with your broker.

 

What are the contract sizes for the PHLX World Currency Options?

In order to provide an easy-to-use foreign exchange trading vehicle, the underlying contract size is generally 10,000 units of foreign currency (1,000,000 for the Japanese Yen). The retail-sized contract, coupled with the U.S. dollar-settlement feature allows for simple calculation of option premium and profit and loss, the same as for index options. Unlike some other foreign exchange products like futures and options on futures where the contract sizes can be much greater, PHLX World Currency Options are "Right Sized" for retail options and futures traders.

 

Am I ever at risk of having to deliver or taking delivery of a foreign currency if I am assigned these options?

No, since the options are U.S. dollar-settled, no delivery or receipt of foreign currency occurs.

 

What is the exercise style of PHLX World Currency Options?

European-style. This means that they may only be exercised on the last trading day prior to expiration (usually a Friday). However, the options can always be bought or sold prior to expiration.

 

What are the trading hours for PHLX World Currency Options?

9:30 a.m. to 4:00 p.m. Eastern Time

 

Where can I obtain quotes on these options? What symbols do I use?

PHLX World Currency Option quotes are available on all quote vendor services and should be easily obtained on your brokerís trading platform screen just as any equity or index option.  

Are charts on foreign exchange available?

Charts that illustrate foreign exchange/U.S. dollar rates are readily available on many brokerage firm websites, and from market data vendors or news websites.

 

In trading these options, what am I looking for in the relationship of the foreign currency and the U.S. dollar?

For call options you would be forecasting that the foreign currency would strengthen vs. the U.S. dollar during the life of the option contract. For put options your forecast would be for the foreign currency to weaken vs. the U.S. dollar during the life of the option contract.

 

What kind of leverage do these currency options provide?

In the spot or cash currency trading markets, investors are often afforded considerable leverage with regard to amount invested vs. actual currency amount controlled. When dealing with options, the leverage is obtained through the premium paid for a long option position that defines the maximum risk of the position, while the highly leveraged cash currency trading exposes the investor to potentially unlimited risk.

 

An Example of a World Currency Option Trade

This example assumes that the Euro spot rate is at 1.2806 at the time of the trade.

Strike Price: A Euro call is expressed as 128.0 - (the same as with index options, we move the decimal point two places to the right).

Premium: An investor buys one October 128.0 Euro call for 1.15 - premium (bids and offers) is made in terms of U.S. dollars per unit of foreign currency. Because the contract size is 10,000 Euros, premium is calculated with a $100 multiplier, so the premium of 1.15 costs $115.00.

Letís say the Euro advances vs. the U.S. dollar to 1.3300 at option expiration, the call option value at expiration would be 5.00 or $500 (intrinsic value) (1.3300 minus 1.2800).

The call could be sold to close the position or be exercised.

The proceeds would be:

Proceeds from sale: $500
Cost of the Option: $115
Profit: $385