Posted on February 9th, 2008 in IMF | 3 Comments »
Whatever the explanation for the forward rate bias and whatever the reason for its persistence, we hope that the forward rate bias will continue to exist well into the future. Armed with this evidence, how can tradable profits be realized? The easiest way to trade the forward rate bias is to use currency futures. Futures contracts can be easily bought or short-sold, are easy to cancel, and have low trading costs. On the other hand, forward contracts are restrictive and difficult to cancel. The pricing of forward contracts and futures contracts is almost identical, so the trading profits will also be equivalent. The trading strategy consists of buying the currency with the highest interest rate and unwinding the position a month later. A one-month holding period is chosen because the forward rate bias is most prominent for shorter periods. The following steps are taken in choosing and executing the strategy. Read the rest of this entry »
What if a stock has run out of steam and we’re anticipating a period of consolidation or lower volatility for a period of time? What if we have identified a range-bound stock and we want to take advantage of this price pattern behavior? We can achieve this by trading low-risk, high-reward options strategies! The two strategies we’ll discuss in this chapter are the Butterfly and the Condor, both of which produce profits provided the price remains within a certain price range, determined by the Exercise prices we select.
Butterflies
The Butterfly involves the following steps (you can use all calls or all puts with the Butterfly—you cannot mix the two):
Butterfly with Calls
Step 1 Buy 1 lower strike (ITM) call
Step 2 Sell 2 middle strike ATM calls
Step 3 Buy 1 higher strike (OTM) call
There are two key points here:
- The ratio between buying the ITM call, selling the ATM calls, and buying the OTM call is 1:2:1.
- The distance between the three adjacent strikes must be equal, with the middle strike being ATM or as close to ATM as possible.
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