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.
Now, Australian Dollar (AUD) also has a strong correlation with gold prices as Australia is also a major exporter of gold in the world markets. Now AUD is one of the commodity currencies that you can trade with Reuters Commodity Index if you find the spread getting wider than the historical relationship.
Ever thought of carry trading. Many trader do it. You too can try it. Hedge funds are the expert in carry trading. One of their popular trading strategies is carry trading. You see noone want 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.
In the last decade, Japanese economy was facing stagflation. This forced the Japanese Central Bank (JCB) to lower the interest rate to almost zero. So carry traders started selling Japanese Yen (JPY) and buying other high yield currencies like British Pound (GBP) or the New Zealand Dollar (NZD) that were offering a much higher interest rate. Now, carry trading like any other currency trading strategy is risky. The risk is of a sudden large drawdown when the risk aversion of the carry traders increases all of a sudden on hearing a breaking news.By taking put and call positions in the two currencies, you can hedge the risk of a large drawdown.
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.
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.
Now, Australian Dollar (AUD) also has a strong correlation with gold prices as Australia is also a major exporter of gold in the world markets. Now AUD is one of the commodity currencies that you can trade with Reuters Commodity Index if you find the spread getting wider than the historical relationship.
Ever thought of carry trading. Many trader do it. You too can try it. Hedge funds are the expert in carry trading. One of their popular trading strategies is carry trading. You see noone want 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.
In the last decade, Japanese economy was facing stagflation. This forced the Japanese Central Bank (JCB) to lower the interest rate to almost zero. So carry traders started selling Japanese Yen (JPY) and buying other high yield currencies like British Pound (GBP) or the New Zealand Dollar (NZD) that were offering a much higher interest rate. Now, carry trading like any other currency trading strategy is risky. The risk is of a sudden large drawdown when the risk aversion of the carry traders increases all of a sudden on hearing a breaking news.By taking put and call positions in the two currencies, you can hedge the risk of a large drawdown.
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.
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