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Kim Cramer Larsson
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Article / 11 August 2015 at 10:45 GMT

FX Options Lowdown: Spot or cash — you decide

  • A EURUSD eight day expiry 1.0850 strike traded within in a total of 500 million
  • A couple of days before expiry, spot may have moved lower but not below strike
  • Spot or cash are the two choices the client has

By Ben Ridgeway

FX Options are traded in European style, meaning they can only be exercised upon expiry. This is different to equity options, which are traded in American style and thus can be exercised at any point over the life of the option, providing it is ‘in the money’.
Kleine Markthalle
Trading European style at Kleine Markthalle in Frankfurt, Germany. Photo: iStock
 
A large trade within the inter-dealer market last Thursday came in the form of a EURUSD eight day expiry 1.0850 strike. The option traded within the brokers in a total of $500 million. If a client were to buy this on SaxoTrader2 or SaxoTraderGO, a premium would of course be paid. This gives that client the right but not the obligation to exercise that option upon expiry. The client has bought the right to sell the option at the strike price of 1.0850. The option is thus a put rather than a call.

A couple of days before expiry, spot may have moved lower but not below the strike and thus still be ‘out of the money’. The price of this option may therefore be higher, and rather than wait in hope that the option should expire in the money, the client may look to sell it. The client may have made money, by receiving a larger premium for selling this option than she initially paid. Due to the move in spot lower, the option is more expensive as it is more likely to expire in the money.

eurusd
Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more 

Should spot move below the 1.0850 strike, the client would hold this option until the expiry. When trading on the Saxo platform, the client can choose the exercise method for the option. Spot or cash are the two choices the client has. 

The former gives the client a short spot position at the strike price of 1.0850. The client may choose this method if she believes that the EURUSD exchange rate is going to move even lower, so would hold the spot position in the belief that there is more profit to be made. 

The decision to exercise the option with the cash method would mean that upon expiry the client would automatically receive the cash benefit of the difference in selling EURUSD at 1.0850 and buying the currency pair back at the spot price at the time of expiry.

Sell here
 Source: Saxo Bank

— Edited by Clemens Bomsdorf

Ben Ridgeway is a sales trader on Saxo Bank's London desk

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