Introducing FX options as an additional tool

Saxo offers FX options on many of the currency pairs she already trades in spot, such as USD/JPY. After reading a basic introduction to FX options, she concentrates on two simple structures:

• Long calls and long puts to take a directional view with a defined maximum loss.
• Protective options used as a hedge for existing spot positions.

The key idea that appealed to her was straightforward: when she buys an FX option, her maximum loss is limited to the premium she pays for that option. There is no margin call if the market moves sharply against her and no forced exit due to a short-term spike.

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Example: bullish view on USD/JPY into a major event

Important note: The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

Consider a typical situation Jane faces. The market is focused on an upcoming US Federal Reserve decision. Jane believes that, relative to expectations, the meeting may reinforce a stronger US dollar tone. She wants to position for a possible rise in USD/JPY over the next few days.

With spot alone, her choices would be:

• Go long USD/JPY in spot with leverage.
• Place a stop-loss order below recent support.

The challenge is that the announcement could cause a short-lived dip below support before any potential move higher, exposing her to stop-loss slippage or an early exit.

With FX options, she has two alternative approaches.

Approach 1: use a long call instead of leveraged spot

Rather than entering a full-sized leveraged spot position ahead of the event, Jane can buy a USD/JPY call option with an expiry date that covers the meeting and a few days afterwards.

At a high level:

• She chooses a strike price near the current market level.
• She selects an expiry that extends beyond the event, giving time for the market to react.
• She pays a premium for the option. This premium is the maximum she can lose on this position.

On Saxo's FX option strategies ticket, one illustrative setup might be:

In this illustration, Jane buys a USD/JPY call option with:

• Notional: 100,000 (USD equivalent in the pair)
• Strike: 157
• Premium paid: 98,300 JPY
• Maximum loss at expiry: 98,300 JPY (the premium)
• Breakeven at expiry: 157.983 (ignoring transaction costs and other pricing factors).

At the time of the quote, USD/JPY is around 156.4, so the 100,000 notional corresponds to roughly 15.6 million JPY of underlying exposure. The option premium of 98,300 JPY is about 0.6% of that notional exposure. In other words, Jane is using a relatively small, fixed amount of capital to control a much larger FX position.

To see the trade-off versus staying long in spot, consider a simple comparison at expiry, using rounded numbers and assuming no intra-period adjustments:

• If USD/JPY falls 3 yen (for example from 156.4 to 153.4):
  • A 100,000 long spot position would show a loss of about 300,000 JPY
  • The long call option would expire worthless, and Jane's loss would be limited to the 98,300 JPY premium

• If USD/JPY rises to 160:
  • A 100,000 long spot position would gain roughly 360,000 JPY
  • The long call payoff would be about (160 - 157) x 100,000 = 300,000 JPY, and the net profit after premium would be around 201,700 JPY.

These numbers are simplified and for educational purposes only. They do not reflect current market conditions, and actual option prices will depend on volatility, time to expiry and other factors. The key point for Jane is that, unlike leveraged spot, she knows in advance that the worst-case outcome on this trade is the premium she pays for the option. In both downside and upside scenarios, the long call reshapes her risk: losses are capped at the premium, while any favourable move in USD/JPY above the strike can still translate into gains, net of that cost.

Approach 2: hedge an existing spot position with a protective put

In some situations Jane may already be long USD/JPY in spot from an earlier trade. She does not want to close the position, but she is concerned about potential downside during the event.

In this case, she can buy a protective USD/JPY put option:

• The put option gives her the right to sell USD/JPY at a chosen strike price.
• If USD/JPY falls below that strike around the event, the value of the put can help offset losses on her spot position.
• If USD/JPY remains stable or rises, the put may expire worthless, but she has benefited from the protection while it was in force.

Functionally, this acts as an insurance policy for the event period. Jane continues to hold her spot position but knows that, for the life of the option, she has defined a worst-case exit level.

On Saxo's FX option strategies ticket, the protective structure can look like this:

In this illustration, Jane is already long 100,000 USD/JPY in spot from an earlier trade. To protect that position around the event, she buys a USD/JPY put option with:

• Notional: 100,000 (matching the size of her spot position).
• Strike: 156.
• Premium paid: 153,400 JPY.
• Maximum loss on the option at expiry: 153,400 JPY (the premium).
• Breakeven for the option at expiry: 154.466 (ignoring transaction costs and other pricing factors).

At the time of the quote, USD/JPY is around 156.3, so the 100,000 notional corresponds to roughly 15.6 million JPY of underlying exposure. The option premium of 153,400 JPY is close to 1% of that notional exposure. In effect, Jane is paying about 1% of the position's value for temporary protection through a key event.

To see the effect of the hedge, consider two simplified scenarios at expiry, using rounded numbers and assuming she keeps both positions open until then:

• If USD/JPY falls sharply to 150:
  • Her 100,000 long spot position would show a loss of about 628,000 JPY.
  • The put option would be worth roughly (156 - 150) x 100,000 = 600,000 JPY. After subtracting the 153,400 JPY premium, the net benefit from the option is around 446,600 JPY.
  • Combined, the spot loss and the option gain leave Jane with an overall loss of about 181,400 JPY instead of 628,000 JPY without the hedge.

• If USD/JPY rises to 160:
  • The long spot position would gain roughly 372,000 JPY.
  • The put option would expire worthless, and she would have paid 153,400 JPY for protection she did not need.
  • Her net profit on the hedged position would be around 218,600 JPY after deducting the option premium.

These numbers are simplified and for educational purposes only. They do not reflect current market conditions, and actual option prices will depend on volatility, time to expiry and other factors. The key point is that, by adding a protective put, Jane turns an open-ended downside in spot into a loss profile that is much more limited if the market moves sharply against her, while still allowing participation in potential upside, reduced by the cost of the hedge.

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What changes for Jane in practice

Adding FX options to her toolkit does not require Jane to abandon her existing style. Instead, it changes how she structures risk around key dates:

• For high-impact events, she is more likely to use long options positions rather than maximum leverage in spot.
• When she already holds a directional spot position, she may temporarily add a protective option around central bank meetings or data releases.
• She spends more time thinking about the time horizon of her view, choosing option expiries that span the relevant events rather than focusing only on intraday moves.

This does not guarantee positive outcomes. Jane still needs to form a view, size her positions sensibly and accept that premiums paid for options are a real cost. However, she now has a clearer framework for the maximum loss on each event-driven trade.

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Risks and practical considerations

As Jane gains experience, she also becomes more aware of the specific characteristics and risks of FX options:

• Premium cost: options are not free. If she frequently buys options that expire worthless, the cumulative premium paid will weigh on her overall performance.
• Time decay: the value of an option tends to decline over time if the market does not move in the anticipated direction. This means timing remains important.
• Liquidity and spreads: as with spot, bid–ask spreads can widen around major events. Jane monitors this when entering or exiting options.
• Short options: selling options can generate premium but also introduces the potential for large losses if the market moves sharply. As a new options user, Jane focuses first on simple long-option structures before considering more advanced combinations.

Understanding these elements helps her avoid treating options as a way to eliminate risk. Instead, she views them as a tool to reshape risk into a form she can quantify more easily.

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What other FX traders can learn from Jane

Jane’s experience illustrates a broader point for FX spot traders who are curious about options:

• FX options can offer a way to stay involved around key events without relying solely on stop-loss orders.
• Simple structures such as long calls, long puts and protective options can be understood and implemented without having to master every complexity of the options market.
• Defining a maximum loss in advance can make it easier to plan trade size and tolerate intraday volatility.

Each trader’s situation is different, and FX options will not be appropriate for everyone. For those who already understand FX markets and are comfortable with leverage, they may provide an additional tool for structuring risk around the events that drive currencies.