Example is the best way to explain how options work in trading forex or any market.
We will look into analysing options on JPYUSD Sep futures contract 6JU7.
How Options Work In Day Trading
For this we will look JPUQ7 options that had option expiration day on Aug 4th 2017. This is a great example of trading USDJPY with online forex broker, futures broker or binary options broker.
For easier calculation let’s say that JPYUSD Sep futures contract price is inverse of USDJPY spot price. Otherwise we’d have to add few pips due to a spread between spot and futures price.
What gets our immediate attention by looking JPUQ7 Open Interest (OI) is Max OI Options for calls and puts.
Max OI for calls was at 0.00910 (USDJPY 109.89) and puts at 0.00890 (USDJPY 112.36).
USDJPY spot price on Aug 4th 2017 during Tokyo and London session was around 110.10 (JPYUSD around 0.00908). This was for us a greater probability of Japanese yen dropping (USDJPY rising).
Why did we speculate that yen could drop at this area?
Because yen was approaching max open interest for calls at 0.00910. This is simple answer to how options work question.
This is why we posted on our Twitter account this tweet on Apr 4th 2017 at 11:52 Berlin time with USDJYP still being around 110.10.
3,274 was Open interest for calls at 0.00910.
How Options Work Summary
If you look at JPUQ7 Open Interest profile you can see that at 0.00905 there were still over 1,000 contracts more of calls than puts so would make sense that if option writers wanted yen lower to try to close it below 0.00905 as well (USDJPY above 110.50).
USDJPY closed the week at 110.68 (JPYUSD around 0.00903).
Once again analysing options markets showed that this is a powerful trading strategy to trade spot and/or futures markets – especially trading forex online.
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