Archive for February, 2013

Trading Yen Future Options with Scaled Dynamics

Currencies have been making new highs in the volatility department. The bank of Japan is appointing a new governor, and all of the potential replacements, especially the Prime Minister’s choice, have much more “dove” (they don’t like to print) like stances on monetary policy. This could mean premium selling opportunities. Writing premium on the Scaled Dynamics Gatekeeper Platform can be done in a number of ways. While anyone could just sell options manually, the Gatekeeper platform allows you to auto quote in two meaningful ways. First, you can use formula strategies to make a one or two sided market, auto-hedging into the futures based on delta and fill price. If you already have a position that you want to move inward or outward, spread bandit will price one strike against another, auto quoting in one strike leaning on the other.

Gatekeeper Platform

To create a two sided market, simply open a formula strategy builder from the main window and set a strike as a primary instrument. The underlying (in this example, March Yen futures) should be set as the underlying. Gatekeeper allows 3 kinds of orders in formula strategies. Formula and Option orders work in the primary instrument and get their price and quantity from the result of pre-defined formulas. Event orders are sent after the formula/option orders have been filled. To make a two sided market, add two option orders, setting one as a buy and one a sell order. If you’d like to delta hedge, add an event order. Save the strategies and you can clone them to get the entire strike range.

Strategy Builder

Use the following formulas for call and put pricing:

Call Bid Price:B76.Price.Call(Future: Reference1.Bid, Strike: Primary.Strike, Rate: Rate, Time: Primary.YearsToExpiry, Volatility: Volatility)

Call Ask Price:B76.Price.Call(Future: Reference1.Ask, Strike: Primary.Strike, Rate: Rate, Time: Primary.YearsToExpiry, Volatility: Volatility)

Call Delta Hedge Price: B76.ImpPrice.Call(Initial: Reference1.Settle, Price: Fill.Price, Strike: Primary.Strike, Rate: Rate, Time: Primary.YearsToExpiry, Volatility: Volatility)

Put Bid Price: B76.Price.Put(Future: Reference1.Ask, Strike: Primary.Strike, Rate: Rate, Time: Primary.YearsToExpiry, Volatility: Volatility)

Put Ask Price: B76.Price.Put(Future: Reference1.Ask, Strike: Primary.Strike, Rate: Rate, Time: Primary.YearsToExpiry, Volatility: Volatility)

Put Delta Hedge Price: B76.ImpPrice.Put(Initial: Reference1.Settle, Price: Fill.Price, Strike: Primary.Strike, Rate: Rate, Time: Primary.YearsToExpiry, Volatility: Volatility)

To adjust volatility, you can click and drag each bid/ask volatility, noting your relation to the implied volatility, or adjust an entire of strikes. You can also manually set your own skew (linearly or exponentially), or just offset from implied volatility.

Vol Edit Window

In the next post, I will detail how to trade options spreads using Spread Bandit. In the meantime, 2 week free trials are available on the Scaled Dynamics website. If you’d like to learn more, contact sales@scaleddynamics.com.