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This is a very interesting and comprehensive article on trading Forex Options written by Paul Stafford who frequently contributes to the comment sections of my blog.
He is a guy who loves complex analysis! He started out as an engineer at NASA, designing image processing hardware used in infrared astronomy. Later, he designed the tracking telescope and hardware used in the IRIS program (InfraRed Imaging of Shuttle) to generate images of the Space Shuttle re-entering the atmosphere. Paul then continued his engineering career at Hewlett Packard, where he specialized in calibration algorithms for RF and microwave signal analysis and generation. With several patents under his belt, he moved to the marketing and finance side of HP and became fascinated by the economics of the business.
Here’s a snippet from his Options Article (Download Entire Report). Let me know if you enjoy it!
Higher Return/Risk from Forex using Options
By Paul Stafford
In this paper we review common methods of trading the Forex markets, and examine a new method, using Forex options, which offers several significant advantages over traditional methods. In this paper, I assume a basic knowledge of trading the Forex spot market.
Trading the Forex market in any manner has many advantages over other markets (such as equities). It is highly liquid, very large, almost impossible to manipulate, its volume driven mainly by commercial trade need (not speculation), and the relevant data is transparent and easily available (except trade volume). However, there are some real pitfalls. If we’re wrong directionally and the market finds us, losses can be severe, even at lower leverages. A modicum of volatility is good for trading, as movement is what sustains a market. However, during the last year volatilities have been enormous. With a 24/5 market, you can’t always be there to monitor positions. The use of stops can prevent a blown account, but they also lock in losses, sometimes needlessly.
As we will see, trading Forex with options preserves much of the advantages of trading Forex, and eliminates some of the downsides:
(Download Entire Report). *The views and opinions are that of Paul Stafford and not Kathy Lien.