Low Risk High Gain Biz model
The Currency Options Risk Insurance business model exploits the unique characteristics of the currency options to set up a risk insurance business with little or low risk.
Why Choose Currency Futures Options?
Options are designed for trading and not investment. You don't own the underlying instrument.
Like Forex trading, currency futures are highly leveraged. From a leverage ratio of 22: 1 and as low as 12:1.
The high leverage is possible because the initial margins set by the exchanges are relatively small compared to the cash value of the contracts. A currency futures options contract of USD125,000 needs an initial margin (good faith collateral) of USD2,300 and variable Maintenance Margin of 22% onwards depending on the volatility of the price.
Leverage is high risk. While leverage makes it possible to trade larger positions, it’s important to remember that leverage magnifies both profits and losses.
Managing risk on a continual basis is required. It is not like you have a sold an option and you wait for the expiration day.
If you don't want to learn risk management, you can't conduct this business profitably.
Cash flow management
You have to keep a notebook and keep looking for opportunities on a daily basis to maximise your profits. You may have to liquidate currency positions and sell more profitable future positions. This is a continuous exercise.
Time Decay and Market Volatility affects your business
Selling of options requires no knowledge of fundamental or technical analysis. It is done purely as a sort of any traditional finance business where you don't lend the money but you get paid for taking risks. That's the reason I have chosen to enter this risk insurance business.
You need to understand why buyers seek protection. You can be a discerning seller and you are not obliged to accept every offer.
Time Decay value is like rental value being paid by a buyer to a seller. It changes on a daily basis depending on the volatility of the currency pair.
If the prices don't move vigorously, you get paid money daily without any effort. If the prices move as a result of increase in volatility you have to re-adjust the positions as part of risk management process.
It is important to know how both time decay and volatility play an important role in our choice of risky trade. It is equally important to understand how both the Time Decay and Volatility are measured if you want to conduct your business profitably.
Risk Management , Roll over and re-adjustment
You can't learn managing risk just by studying theory itself. You will have to watch my live trading and gain proficiency by practicing it extensively on a paper trading account or hire a mentor who can help you practise. It is an art that requires years of practice.
A good year for Option Sellers
An extra-ordinary year for option sellers!
An yearly return of 284% on deposit.
Truly a low-stree trading environment . Hardly required any adjustments. Even the premium that is paid upfront
was not utilised to shore up the margin. Channel size high and low was 1000 points .
Anybody selling call and puts bracket in the range of 700 to 800 points would have made 250 points or pips @12.50 or $3,125 for
each of three 120 -day duration trades in a year by putting up a deposit of $3,300 by selling in the brackets
of 700-800 pips or points.
It's an yearly return of 142% for a conservative trader like me who sets aside 50% of the margin as a buffer for
(a) coping with changes in margins that are revised dynamically by the broker and CME depending upon the volatility of the market and
(b) use the extra margin to do readjustment trades as part of risk management.