23/1: Derivatives trade on FXCM broker

Something else entirely.

As part of the SNB fiasco last week, FXCM (who caters primarily to retail traders) nearly went bust.  Thanks to a $300 million rescue loan from an unassociated entity, that came through in less than 24 hours, the broker managed to continue.  Nevertheless its stock price on the New York Stock Exchange fell from close to $15 at the start of Thursday to around $1.50 on Tuesday  – albeit a 90% stock drop.  FXCM is one of the brokers I use most often for my own trading, hence I am monitoring the situation closely.  Another good article on the FXCM story here.

I figured that this might be overdone, and decided to take an options trade using my optionsxpress account – a great broker for trading options and shares in the US if you fancy that.  The lowest available strike on FXCM stock is currently $2.50.  Ultimately I was able to buy 15 contracts of the March $2.50 calls for $25 (plus $1 commission), whilst FXCM was trading around $1.80, on Wednesday.  I had tried to get in for $15 on Tuesday, whilst it was trading $1.40, but couldn’t get filled.

On Wednesday the stock rallied from $1.60 to $2.33 – around 45% in a single day.  On Thursday the stock continued to climb.  At this point I was able to sell the Mar $5 calls for $21 – meaning that my net outlay was now only $4 (paid $25 for the $2.50 calls, sold $5 calls for $21) – thus my maximum loss on this trade, which would occur if FXCM closes below $2.50 in around two months, would be $4/contract.  My maximum profit per contract is $246 (the $2.50 difference between the strike prices multiplied by 100 shares/option contract, less the $4 outlay).  This will occur if FXCM trades at or above $5 in two months time.  My profit/contract will be somewhere between -$4 and $246 for any stock price between $2.50 and $5.  So basically I have managed to put on a “free bet” thanks to the quick recovery of the stock over Tue-Thu.

This can be (more easily) explained by what is called a Risk Graph:

FXCM options trade

The stock rallied to close at $3.07 on Thursday (after making a intraday high of $3.50) – so another 33% gain for the day.  This is obviously going to be helped by the global rallying in equity markets, stemming from the clarification of the ECB’s Quantitative Easing program to begin in March. Go FXCM!!

Bear in mind that I have done a lot of options trading in the past (including spending 6 months with a market-maker for Euribor options), so it was easy for me to think about and setup this trade.  Generally speaking, I would tell retail traders to be extremely careful in trading options since it is a lot more complicated than trading CFD’s or binary bets.  As well as anticipating direction, traders must judge the timeframe, the size of potential moves and the anticipated volatility in the underlying stock.  It is these factors that feed into the well-known Black-Scholes option pricing model developed in the late 1970’s.  And the bid-ask spread and commission costs can be rather nasty too.

27/1 Update:

On Monday 26/1, FXCM closed at $2.44 – meaning that the $2.50 calls are slightly out of the money.  The $5 calls are now trading $5-$10.  The $2.50 calls are trading $45-$50 – this means that the call spread is trading $35 (bid) – $45 (offered) – remember that I paid $4 for the call spread last week.  There are still more than 50 days to the expiration date of the options – thus plenty of time for price to rally up and turn this into a big winner.  And if price doesn’t move then I lose a mighty $4 per contract.  That said, I am trying to put on more call spreads at good prices, but thus far have not been filled.

29/1 Update:

FXCM was trading down today.  To around $2.15.  At this point I purchased another ten contracts of the Mar $2.50 calls for $30.  I sold entered a GTC order (good till cancelled, as opposed to day-order) to sell ten of the Mar $4 calls – in the last few days the exchange has added options with $4 and $6 strikes for FXCM.  Yesterday FXCM announced that it would aim to claw back 60% of the £225m loss that was incurred on the SNB-Fiasco day (15th January).  60% of the loss was incurred by approx 10% of the client accounts held at FXCM – institutional and high net-worth individuals.  The remaining 40% of the loss was made up by retail traders who hold 90% of the brokerage accounts.  FXCM will essentially forgive any negative balances created in retail trader accounts by the CHF fluctuations.

21/2 Update:

Yesterday FXCM closed at $2.05.  Both the $2.50 and the $5 call options are now worth close to $0.  However there are still 27 calendar days to the expiration date of the options, so who knows what will happen.  Though in all likelihood the options will expire worthless and my loss will be equal to the net amount I paid (for 25 contracts) after deducting the premium I received for the $5 calls (15 contracts).

Expiration Day Update (middle of March):

FXCM closed somewhere around $2 on expiration day.  This means that both the long calls and short calls expired out of the money and were worthless.  My net loss on the position was basically equal to the 10 $2.50 contracts that I purchased on 27th Jan.  The bullish vertical call spread (long $2.50 strike, short $5 strike) was worth zero but I paid only $4 per contract for it – so pretty much a scratch for the spread trade.  As all the options expired worthless, I did not have to do anything on expiration day.

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2 Responses to 23/1: Derivatives trade on FXCM broker

  1. you only put down $375 on this trade?? My view is this was a home run and you should have gone bigger. Still the positive is you saw the opportunity and you took it.

    Liked by 1 person

  2. Pingback: 27/1 More real-time “paper” trades on my favorite instruments | George's FX trading blog

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