Forex Blog: Currency Trading News & Analysis.

January 21st 2009

Currency Options as Forex Strategy

A steady decline in risk aversion has taken place over the last few months, such that investors once again appear willing to own riskier assets, especially in the developing world. If this continues, increasing demand for emerging market assets would probably be accompanied by currency appreciation. While there are several ways that investors could conceivably profit from this trend, there is an overlooked strategy: currency options. Specifically, some traders have begun to write "out of the money" put options- the equivalent of selling insurance to investors that wish to protect themselves from further declines in emerging market currencies. Those who specialize in currency options, however, have noticed declines in both implied volatility and the risk-reversal rate, which together suggest that such a possibility is now perceived as less likely. Regardless of whether you plan to employ such a strategy, it's worth paying attention to currency options prices, as they represent valuable snapshots of a given currency's perceived health. Bloomberg News reports:

Traders quote implied volatility, a measure of expected price swings, as part of setting options prices. Options are contracts granting the right to buy or sell a specific amount of a security in a given time span.

Read More: Currency Options Best Bet on Risk Aversion Drop, Barclays Says

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