Many currency traders don't know much about options. Currency options are a highly profitable method to make money from a trend in the currency market. Many traders simply focus on spot trading. If you combine spot trading with currency options, you can multiply your portfolio return many folds. There are some currencies that are popularly known as commodity currencies. You can trade these currencies with commodities using options! For example, South Africa is the world's largest exporter of gold. Its currency Rand is intimately correlated with gold prices in the international market. When you find the spread between gold prices and RAND to be unusually wide and out of its historical relationship, you can simultaneously trade a gold call and a rand put in case the spread between RAND and gold prices is negative or the other way around. Similarly, you can trade options if the spread between Australian Dollar and Gold prices widens and becomes out of sync with its historical relationship. You can also trade options when the spread between the Australian Dollar (AUD) and Reuters Commodity Index widens. Reuters Commodity Index is a useful index that shows general commodity prices. What you are doing is betting on the fact that the spread is wider than the historical levels and is expected to narrow down to the normal. Now, many traders know that one of the most popular trading strategy used by many hedge funds is carry trading. Carry trading involves buying a currency with a high interest rate and selling a currency with lower interest rates. Selling of the lower interest rate currency is often leveraged. The attraction of the carry trade is the large return on the interest rate difference. In the last decade, Japanese economy was facing stagflation. This forced the Japanese Central Bank (JCB) to lower the interest rate to almost zero. So carry traders started selling Japanese Yen (JPY) and buying other high yield currencies like British Pound (GBP) or the New Zealand Dollar (NZD) that were offering a much higher interest rate. Now, carry trading like any other currency trading strategy is risky. The risk is of a sudden large drawdown when the risk aversion of the carry traders increases all of a sudden on hearing a breaking news.By taking put and call positions in the two currencies, you can hedge the risk of a large drawdown. One of the popular carry trading pair was GBPJPY. Many traders have encountered large drawdowns by selling JPY and buying GBP. As a trader, you can reduce that risk by trading put and calls on these two currencies by using spread analysis on their historical correlations.
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