Ebele Kemery: Trading options can be highly profitable if done correctly. Options contracts get written on many different assets including currencies and commodities. One way is to spot trade these markets and the other way is to use options on these assets. Several currencies and commodities such as gold and copper are intimately related. You can use this options trading strategy when you find the correlations between these currencies and commodities out of sync.
For example, South Africa is the world's largest exporter of gold. Its currency Rand is intimately correlated with gold prices in the international market. When you find the spread between gold prices and RAND to be unusually wide and out of its historical relationship, you can simultaneously trade a gold call and a rand put in case the spread between RAND and gold prices is negative or the other way around.
Similarly, you can trade options if the spread between Australian Dollar and Gold prices widens and becomes out of sync with its historical relationship. You can also trade options when the spread between the Australian Dollar (AUD) and Reuters Commodity Index widens. Reuters Commodity Index is a useful index that shows general commodity prices. What you are doing is betting on the fact that the spread is wider than the historical levels and is expected to narrow down to the normal.
Ever thought of carry trading. Many traders do it. You too can try it. Hedge funds are the expert in carry trading. One of their popular trading strategies is carrying trading. You see no one wants the money to sit idle without making any return. Carry trading is a nice way to profit with the interest rate spread between two currencies. You look for a currency pair that has one currency offering a much higher interest rate as compared to the other. You buy the high interest rate currency and sell the low interest rate currency.
Japanese Yen (JPY) was one of the most popular selling currencies for many carry traders in the last decade. Popular carry trading currency pairs is GBPJPY and NZDJPY. Another popular currency is selling Swiss Franc (CHF) and buying a higher interest rate currency. The risk in carry trading is the potential of a large drawdown. Now, you can avoid the risk of these drawdowns in carry trading by trading put and call options on these currencies.
One of the popular carry trading pair was GBPJPY. Many traders have encountered large drawdowns by selling JPY and buying GBP. As a trader, you can reduce that risk by trading put and calls on these two currencies by using spread analysis on their historical correlations.
Ebele Kemery is a member of the Global Fixed Income, Currency & Commodities (GFICC) Group. Based in New York, Ebele is the head of Energy Investing within the Commodities team. Prior to this role, she provided institutional client relationship management and tailored risk management solutions in the Investment Bank’s Global Commodities Group.
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