Options levels in Forex trading
Hello friends forex traders!
Exchange trading is considered easier than trading on the Forex market: technical analysis works better, there is more information on the network, in addition, many very useful data can be obtained absolutely free from the network resources of exchanges. Today we’ll talk about the CME exchange, which uploads data on optional levels for currencies.
By the way, stock options are very different in nature from the same binary options that are now widely heard. Typically, large players use options mainly to hedge their current futures positions, although this is not uncommon and ordinary speculation. For any currency pair, both futures and options are available for trading. All data on the exchange, unlike Forex, is absolutely transparent - you can see the number of option contracts at any time and determine the main market levels at which strike prices are likely to be targeted by large players.
In today's material we will analyze in detail optional levels and how to apply them in trading.
CME Group Inc. is the Chicago Mercantile Exchange Group, the largest North American financial derivatives market, built by combining the leading exchanges of Chicago and New York. The group was formed in 2007 through the merger of the Chicago Board of Trade and the Chicago Board of Trade. The organization’s headquarters is located in downtown Chicago. Later, on March 17, 2008, it was announced that a subsidiary of the New York Mercantile Exchange NYMEX Holdings and COMEX from New York will join the group. The final merger was completed on August 22, 2008. Three exchanges currently operate as a single market. By the way, on February 10, 2010 CME announced the purchase of 90% of the Dow Jones indices, including the most famous Dow Jones index.
CME Daily Newsletter
Every day, the CME exchange publishes preliminary reports, which appear at 7.45 - 8.40 Moscow time. The final report comes out within an hour after the start of the American session.
The data from this newsletter will allow us to calculate option levels and take them into account in our trading. The option level shows the quotation at which the option seller goes to breakeven.
The full version of these daily reports is available at this and this links. The first link is ftp, where you can find the full version of the newsletter in the form of archived pdf files. The second link provides a version broken down by assets in the form of an html page. The full version is quite voluminous - it contains over 500 pages of text and weighs about 14 megabytes, but, fortunately, we do not need all this information.
By clicking on the second link, you will find a newsletter broken down into various assets - agriculture, energy, stock indexes, interest rates, metals, real estate, currencies and even weather futures and options.
Let's find the FX currency section and select, for example, Call options on the Japanese yen (Japanese Yen Call Options - PG 33).
Clicking on this link will open a rather confusing pdf document:
At the top of the file, the type of document is indicated in bold - final (FINAL) or preliminary (PRELIMINARY). In principle, anyone will do for our purposes, since in practice they are not much different.
Now you need to find the beginning of the table called "JAPANESE YEN CALL Options ** SETT. PRICE **"
In the first column you need to find the month following the current one. This is August at the moment. Next, select a quote either by volume or by open interest. Trade volume is the total number of all contracts, both open and closed. Open interest is the number of only open contracts for a given quote. Therefore, it is preferable to use just open interest. Let's write all the quotes for August with a fairly high open interest, for example, over 500. I use the Excel plate for this, which I will enter:
- the quote itself from the first column;
- The first number in the column "SETT.PRICE & PT.CHGE.".
Here is what you should have been able to do:
If we want to get a level for CALL options GBPUSD or USDCAD, we need to multiply our premium by a factor of 0.01. For CALL options yen and PUT options GBPUSD and USDCAD nothing more is required. For PUT options on the yen, you need to multiply the premium by 0.0001.
Now after the first column, insert another column and insert the values from the first divided by 100,000 into it. For currency pairs with five-digit quotes, divide the value from the first column by 1000:
Add another column after the "Premium" column and name it "Level". In each cell of the new column, do the following:
- Summarize the columns "Quotation 2" and "Premium";
- Divide the unit by the received value.
For example, for the first row of my table, I get 1 / (0.00875 + 0.000165). At the same time, for CALL options, we add the data from the columns “Quotation 2” and “Premium”. For PUT options, the formula will look like this:
1 / ("Quotation 2" - "Premium").
If our quotation is direct (USDJPY or USDCAD), then we divide by one. If the quotation is reverse (GBPUSD), the formula will take the form: “Quotation 2” - “Premium” or “Quotation 2” + “Premium”. That is, the unit is no longer needed.
Here is the summary table of levels for CALL options:
Repeat all the steps for PUT options (Japanese Yen Put Options - PG 34) and get the following table:
Now let's put the resulting levels on the USDJPY chart of period H4:
The greater the open interest, the thicker the level. Red shows CALL levels, blue PUT levels. For the first, major players work to increase, for the second - to decrease. Let's get the picture a little closer and remove the thinnest levels:
As you can see, the optional levels really act like support and resistance levels, and they work very well. Moreover, these levels are based on real options market volumes and are followed by major players, which makes them even more valuable.
Now let's do the same for the USDCAD currency in order to fix the calculation method.
For CALL options we write quotes, divide them by 1000, write out a premium. Then we divide the unit by the sum of premiums and quotes. We get the following table:
For PUT options, the picture is as follows:
Put on the chart:
Let's make the scale bigger and remove insignificant levels:
Information is also available on the pound and Swiss franc, New Zealand and Australian dollars. In addition, you can even find in the bulletins data for the Russian ruble or Mexican peso, but the volumes are quite small. Also interesting are data on energy carriers such as natural gas, brent and WTI oil, gasoline and diesel. Data is also available on major indices, such as the S&P 500, Nasdaq, Nikkei. Metal trading enthusiasts will find here optional levels for gold, silver, copper, iron ore, palladium and platinum.
This methodology for calculating levels does not take into account the so-called forward points, which make allowance for the difference in interest rates for various currencies. As a rule, this amendment comes out in the region of 1-2 old points and I believe that such an error is not significant.
Why option levels are useful
The optional levels can be perfectly applied to determine the zones of support and resistance, which we were very convinced of. Such levels will be based on real stock data, and they are interesting to large players. The logic of these levels is simple: if large traders parse CALL options, then most likely this way hedges a short position on the futures for these instruments. As a result, the CALL level is a very real resistance level, while the PUT level is a support level. You always have a choice - draw the levels the old way, by eye, or "draw" them from the heads of major players. It is worthwhile to understand that where serious money is spinning, and the preparation of the players is completely different. These are for the most part smart money, but no matter how smart professional traders are, they are sometimes wrong.
Another interesting fact that can help in trading: if the daily CME report does not arrive on time, this day you should expect large volumes, and, as a result, increased volatility.
Optional levels are undoubtedly a very useful tool for any trader. In combination with fundamental and technical analysis, as well as Price Action, it can turn into a very powerful tool. And instead of putting levels on the eye, guided by guesses, it is much more efficient to use real market data.
Good luck and see you soon!