Thread: Using Oanda FXBoxOptions Profitably

I've searched the forum for threads around http://fxtrade.oanda.com/boxoption/, but have just found limited information. I did find one of capitalist88's great articles concerning the calculation of Oanda's effective risk propagate, which stays obviously high. Given that these options are clearly not fairly priced, is there a way to trade profitably with them, or are they simply a different way for an FX broker to profit from retail traders' penchants for gaming?

Theoretical conjectures are welcome, but if anyone really has experience using them in a profitable manner, I'd particularly love to hear about it.

Here are notable previous threads regarding Oanda's FXBoxOptions:Successful Box Option Trades (Oanda) Oanda Box Options Box Option Trading anybody trading Box Options using Oanda???

This really is a co-incidence.

About two days ago I logged into my Oanda Demo for the very first time in probably 12 months. Was playing with box options.

I DO have thought on how you could play with them.

The only advantage I could see getting from them is when price stays totally flat. Any other use wouldn't be any advantage.
You pay a maximum price for the odds of missing/hitting the box. This is no different than placing a stop loss . In the event of setting a LONG time frame box it seems there could be an advantage as far as risk to reward moves. In the event you anticipated price to never trend. Though generally in this case you know there is a range there to trade. A tight range that is useless due to spread prices may benefit maybe.

Like you. I'm willing to bet it is about the homes chances of improving income. LOL

I mean to appear further into it, of course. Perhaps a pivot based egy?

Take notice of exactly what Phil McGrew and DarkStar are talking about in that very first Powerful Box Option Trades link.

There is no doubt that any sort of reasonable motion in price would make these a tear off. Typical of brokers when introducing new kinds of trading instruments.
Certainly the only possible benefit IS during a flat market. But, again, this would have to be carefully looked at.

Unless box choices have changed in the past ye ar, they ar e a much larger trick than this particular hedge feature we have been discussing. It comes down to m ar ket mechanics, and the widespread lack of understanding for them. Im an options expert, but you dont have to be one to understand why these box choices are poor...

last I he ar d, you couldn't buy and sell box choices from anybody except oanda. This really is a FAKE m ar ket. In the blackjack table, you can just bet against the house, not other players at the table. This is GAMBLING because the home sets the chances, and they ar e the only one you can bet from. Same with oanda box choices. . .you can simply buy and sell from the merchant (aka oanda aka the house). I cant buy a box alternative and sell it around the open m ar ket, because there's absolutely no open m ar ket, I can simply sell to oanada that has a calculator ensuring that the odds ar e within their favor. This is completely and not its gambling, trading. When oanda has changed their policy to permit selling of the choices within a open m ar ket please do allow me to know.

I truly hope we dont get a lot of people justifying the viability of all box choices by talking the egy they use (such as retains happening with the hedge feature). The egy doesnt thing, the box choices ar e inherently disadvantageous and therefore any egy that utilizes them can be improved by substituting the use of the choices with different places.

Originally Posted by ;

I really hope we dont get a lot of people minding the viability of box choices by discussing the egy they use (such as retains happening with the hedge feature). The egy doesnt thing, the box choices ar e inherently disadvantageous and consequently any egy that uses them can be improved by substituting using the choices with different places.

I am not sure that is exactly the situation. The box choices seem like they really do provide a decent, though skewed, form of hedging. Surely, you are right - it'd be preferable to buy real choices from ISE or CME because of real-market fair spreads and resale chance. On the other hand, it's very convenient to have the choices available all in one platform.

Allow me to provide an instance of a egy I am testing, and hopefully you can show me what's wrong with my idea. From the chart attached to the article, you are able to see what I think to be a USD/CHF uptrend. It appears to have recently broken some resistance, so I am planning long. I have a roughly 150 stage take profit and stop loss. I usually shoot for a 2:1 TP to SL ratio, but that is another thread altogether. Anyway, I am conscious the USD/CHF is in a long-term downward tendency, and that there's intermediate resistance and also a potentially floundering US economy on the way, so I would like to hedge the downside risk of the trade. I estimate that if the trade were to go south, it would do this sometime within the next week or so. To hedge this risk, I've purchased a box option for $55 that pays $94.88 after hit. The stop loss of my trade is set about 144 pips from the entry, with a standing of 6400 USD/CHF, for a possible reduction of $92.16.

The idea here is that when the trade did go against me, I feel it would go relatively fast. In case it goes down near my stop loss within the next week, I will automatically get $94.88, offsetting my possible reduction of $92.16. If the trade doesn't go against me, I stick to make 150 pips * $0.64 = $96. Subtracting the option price ($55) from $96, I've a profit of approximately $41 (plus a small amount of curiosity ).

Of course, this egy supposes the USD/CHF will go one way or the other. It could slip right into a trading range, which would throw off the whole scenario. In that scenario, I could buy a choice directly in the front of the price action, but that still may not make up my whole loss on the original option buy.

So that is my trade idea. Please critique, and let me know the possible pitfalls of this kind of hedging.

I cant really comment in your own egy, also I don't have any decision on whether it's profitable or not. But at the close of the day you're gaming with this attribute. You are betting against the player who fixes the likelihood of this game, only luck can save you

Hi Drummer,

I am the one that did this back of the envelope calcs about the odds of these box choices. I also did create a egy for using them, but dropped it because I didn't like the high drawdown possible. I made a little money with the egy, but I will create an edued guess I would have lost in the long run because my edge was so slight and the drawdowns could have killed me. I believe my motivation was more to be sort of on your face to Oanda with respect to these so called alternatives by out-statisticing them (yes I invented a new word there ).


Anyhow, the egy involved with multiple regression analysis on four variables which clarified the price action of 2 finished weekly bars. The outcome of the analysis gave me a projected closure for the next week that I used as a starting point in the next step.

The next step was to utilize a spreadsheet I had created together with some historical information to find out the historical probability the week's near would fall between 2 points that were equidistant in the projected closure. If I had a projected near 1.4000 on EUR/USD by way of instance, I'd assess the probality that price would collapse in the 100 pip range from 1.3950 to 1.4050.

I had to find a hit range such as this in the end of the week to get the box, set up in this manner that the trade would have a positive expectancy. The thought was to prepare the box for the past hour of the week (or all of the thinnest possibility was; I forget) which extended from the high to the low of the strike range (more on the way I discovered this in a second). So at the start of each week, even after the spreads narrowed and the box prices dropped, I'd set these up high thin hit boxes in the close of the day for the coming Friday.

I had to find a hit range to ensure expectancy was positive based on the probability of a hit and Oanda's payoff. So for the example above, if the choice will cost me $50 and paid $55 then I was risking $50 to profit $5. To get a positive expectancy my probability of a hit would need to be 1-5/55 roughly 91%. If the probability showed up in 80 percent or something then I would need to stretch out the strike range and retest based on the new Oanda payoff. I'd Excel set up so it calculated probabilities for an entire array of possibilities so I could check them quickly contrary to the payoff values in Oanda's platform.

The key to the thing was that I wasn't centering my goal zones on the last near, but was rather skewing them up or down depending on the multiple regression analysis I did in the start to find the projected closure. Like I said though, I think that this egy would have been killed by drawdowns, OR Oanda could have only made the payoffs even worse than they were to compensate for geeks like me. (Being very undercapitalized, I am still searching for a Part-time job to pay the bills but I keep putting it off; anybody know of a successful trader who May Want to hire a Inexpensive geek?? )

Originally Posted by ;

To hedge this risk, I've purchased a box option for $55 that pays $94.88 when struck. The end loss of my commerce is set about 144 pips in the entrance, using a position of 6400 USD/CHF, for a potential reduction of $92.16.

The notion here is that when the trade did go against me, I feel it would go relatively fast. If it goes down close to my stop loss in the next week, I will automatically receive $94.88, offsetting my potential reduction of $92.16. If the trade does not go against me, then I stand to make 150 pips * $0.64 = $96. Subtracting the option price ($55) from $96, I have a profit of approximately $41 (and a tiny amount of interest).

Of course, this egy assumes the USD/CHF will proceed one way or another. It could slip into a trading range, which could throw off the entire scenario. In that event, I could buy an option directly in the front of the price action, but still may not make my total loss on the initial option buy.

So that's my trade notion. Please critique, and allow me to know the possible pitfalls of this sort of hedging.

I'm doing this off the top of my head so when I screw this up do not TAZE me bro!!

There are multiple possibilities here based on if the box gets struck or not, the stop gets hit or not, the TP gets struck or not, each using its own payoff and probability, so the expectancy of this thing would be hard to figure out to say the least.

1. Nothing gets struck: the payoff is (exit - entrance - $55)

2. Box hit just: (exit - entrance $40) I'm rounding the payoff of the box to $95, and because you paid $55 the internet is $40.

3. Stop hit just: (-$92 - $55) = -$147

4. TP hit just: ($96 - $55) = $41

5. Box and TP reach: ($96 $95 - $55) = 136

6. Box and stop struck: ($95 - $92 - $55) = -$52

7. TP and cease strike: not possible

8. All three struck: impossible

Therefore there are six possibilities, each with its own payoff and probability, and I have no clue what the probabilities are clearly. But one thing to keep in mind is that EVERY possibility involves a $55 cost because you have already paid for the box.

Ok, now in order to figure out if ship options make sense, we could compare your egy to another one which does not utilize box options. I will have to make a lot of assumptions, however should we only make the same assumptions in the two versions, with the one difference being the existence of box options or not, then we should have the ability to isolate the box alternative impact so to speak.

So just for chuckles, let us just pretend that all the probabilities are equivalent so we can dispense with that query. I know they're not equivalent, but it doesn't matter because we're using exactly the identical premise in both versions. I will also assume that in the cases where the payoff depends on your exit (neither cease nor TP gets hit) the exit is in the entrance price. Again, same premise for the two versions simply to remove that variable from the analysis.

So. . .we add up all of the payoffs above:
(-55 40 -147 41 136 - 52) = -37

But do not despair because this number is based on unrealistic assumptions therefore it is not stating that your egy has a negative expectancy. It's only an index for contrast. Now let us go through precisely the exact same process without box options.

The chances and payoffs are:

1. Nothing gets struck: payoff is 0, (supposing exit = entrance like we did in the last model)

2. Stop only struck: -92

3. TP only struck: 96

4. Both struck: not possible

These include up to 4.

So in conclusion, everything else being constant, the accession of box options to the egy has a negative impact of (-37 - 4) = -$41.

Conclusion: Merlin is right; it is possible to create a egy that implements your market view without box options and it will save you money in each case.

Q.E.D.! (LOL, I love saying QED)

Originally Posted by ;

Conclusion: Merlin is right; you can make a egy that implements your market view without box options and it will save you money in each circumstance.

Merlin would likewise have in mind actual options trading.

When you include the benefit of having the ability to compose your own calls and places too, you make a completely new range of trading egies.

Originally Posted by ;

Merlin would likewise have in mind actual options trading.

If you add the advantage of being able to compose your own calls and puts also, you create a whole new range of trading egies.

You're right, he said he would be curious if they ever change the feature into an actual product that could be traded with other traders in a true market.

I would not though. I use Oanda now and used to trade options years ago, but I already have a tendency to create my methods too complied as it is with them.