How to Read the Currency Futures Options Table (with a bit of theory)

By Dr. William Pugh

 Example of a currency futures option tables using the Swiss Franc.

 SWISS FRANC (CME)

125,000 francs; cents per franc
Strike    Calls Settle    Puts-Settle

Price     Feb Mar Apr  Feb Mar Apr  The premiums you see in the matrix are the "insurance"
7100      .60 1.04 1.38     .38   .82   1.26   premiums to guarantee the buyer the right to buy or sell
7150      .30  .84  1.18     .65  1.18  1.56  SwFrancs at the indicated strike price.
7200      .20  .70  1.02     .96  1.50  1.78

Example: A March call to buy SWF at 71 1/2 cents would cost 0.84 cents/SwF.  The contract, for 125,000 frances would cost 0.84 cents times 125,000 francs.

Note the important information at the top of each currency's table. First is the contract size for futures options, which will always equal the size of a futures contract. That the two equal is not surprising, as the buyer of a call option has the right (but not the obligation) to buy a futures contract at the agreed on strike price. (The owner of the Put option has the right to sell the contract). The second piece of information is the unit of U.S. currency that the option premium (or option price) is being quoted in. Usually it is cents per unit of forex (here the franc).

The best way to understand the table is to analyze some premium (price) quotes. I will illustrate using both speculators and hedgers.

Let's look at a Call Option: (using the Speculator as an example)

Suppose you are a speculator and are bullish on the Swiss Franc. The most direct thing you can do here is to buy a call option. (Selling puts also may be a bullish stance, but that is primarily a way to earn premium income.)

Looking at the second row (the line in red), you could buy a March call for .84 cents (or $.0084) per Swiss Franc. Since this contract is for CHF 125,000 per contract, the price per contract works out to less than 125,000 cents ($1,050). What do you get for your $1,050? (Add commissions, by the way.) You have the right to buy a CHF futures contract at a price of $0.715 per franc on or before the third Wednesday in March.

This will add up to $89,375 for the 125,000 francs, only if you wish to take delivery (plus the $1,050 cost of the call). However,rarely will the speculator (or the hedger for that matter) exercise the option. The purpose of the speculation is to make a profit if the option finishes in-the-money or letting it expire worthless otherwise.
 

For example, suppose on that third Wednesday, the underlying future closes at 73 cents. Since you have the right to buy  Swiss Francs futures, that the market values at 73 cents, for a mere 71.5 cents, your option ends up being worth 1.5 cents times 125,000 Swiss francs ($1,875 per contract). As you only paid $1,050 for the contract, you make a profit.

In contrast, if the future closes at 71.5 cents or lower on that fateful Wednesday you lose the whole $1,050, as your call expires worthless.

Since the March contract expires on the third Wednesday in March, you might wish for a bit more time to make that "killing" in currencies. So buy the April contract instead: more time to speculate (with a strict limit on your losses, but theoretically no limit on your potential gain). However, this longer-term contract is essentially adding one month of "insurance", so the premium will be higher ($0.0118 per Swiss franc).

Let's look at a Put Option: (using the Hedger as an example)

Suppose you are hedger, who is "long" the Swiss franc (someone owes you Swissies). You could, of course, simply "lock in " a forward or future rate by selling the CHF on the forward market, futures markets, or borrow some francs (the spot or money-market hedge). And if you are satisfied to "lock in" a rate, then this strategy will be the least costly.

However, what if the amount you are owed is "conditional", that is, whether or not you get the Swissies depends on whether the Swiss customer decides to accept your bid to sell him a good or service. Since you are not really sure whether  you even have a long exposure to the Swiss franc until you get a firm "yes" from the client you use a put option to hedge.

Or take the case where you do  have a firm commitment, what if you are not really concerned that the Swiss Franc will fall, in fact you feel that the Franc is likely to rise.  You goal might be to be in a position to gain if the Swiss Franc rises.  A put would allow you to enjoy upside potential, while limiting downside losses (again, just like conventional insurance).

In either case, you want to be protected if the CHF falls through the floor: 1) In the conditional case, if your bid is accepted you will be long the CHF. 2) In the case where you are hoping for a windfall gain, you know that your hunch could turn out wrong.

In either case, you want to be able to 'walk away" from the option if the Swissie rises. 1) If the bid falls through, you don't want to be holding a short position in the futures market (and no Swiss customer). 2) If you have a firm customer and if your hunch turns out to be correct, you would want to be able sell your future Swissies at the market, not at some older locked-in price.

Suppose, you only need 30 days protection: Again, looking at the second line, choose the shortest-lived put - which sells at a premium of $0.0065 per Swiss Franc. The price per contract works out to $812.50. You have essentially purchased an insurance policy that, if the CHF falls, limits the loss on your selling price to 71.5 cents. You have the right to sell a CHF futures contract at a price of $0.715 per franc on or before the third Wednesday in February.

Like the case of the call, the options are rarely exercised, but rather sold back to an option writer before expiration.
 

For example, suppose on that third Wednesday, the underlying future closes at 71.5 cents or higher: You lose the whole $812.50 as your put expires worthless. Since you are not a speculator, losing is more like not having to use your car's insurance policy. You were simple attempting to protect the dollar value of some Swiss assets, but the assets didn't need protecting after all. (The CHF did not suffer "an accident".)

In contrast, if the Swiss Franc falls to 65 cents, you will "use" the put. Since you have the right to sell 65 cent Swiss Francs for 71.5 cents, your option ends up being worth 6.5 cents times 125,000 Swiss francs ($8,125) per contract). You make a profit, when you sell it back to a put writer. The profit will partially cover your loss in value of the Swiss francs that you are long.

Similar to the call option, the longer the term of the insurance, the higher the put premium.

 The same example of a currency futures option tables using the Swiss Franc.

 SWISS FRANC (CME)
125,000 francs; cents per franc
Strike       Calls Settle       Puts-Settle
Price         Feb Mar Apr       Feb Mar Apr

7100          .60  1.04 1.38      .38   .82  1.26
7150          .30   .84  1.18      .65 1.18  1.56
7200          .20   .70  1.02      .96 1.50  1.78

The Strike (or exercise) price and whether the option is "in- or out-of-the-money"

Call Option: Looking at the column in red, you could buy an April call for 1.38 cents, 1.18 cents, or 1.02 cents per Swiss Franc. These contracts get less expensive as the strike price goes up., Since a call gives one the right to buy, a high buying price is less desirable than a low price. A call is "in-the-money" if it has intrinsic value today. (If the call was exercised today and it allowed one to buy CHF futures below the market price, then the call has intrinsic value.)

The intrinsic value (IV) is easily computed: for a call, one simply subtracts the options strike price from the market value of the future. A negative value simply means the intrinsic value is zero.

The IV is usually expressed on a per currency unit basis (like the tables): Suppose the value of the underlying currency future is 71.3 cents, then the IV of the three Calls are 0.3 cents for the 7100 strike price call and zero for the other two.

The remaining premium is usually called the time premium (sometimes, speculative premium). The time premiums would be the (price) premium less the IV:

1.38 - .30 = 1.08 and simply 1.18 and 1.02 for the higher strike prices.

Some things that affect the time premium: the Black-Scholes Model was one of the first generally accepted methods of estimating an option premium. Along with the option's IV, the formula assumes the options TP to be affected by

  1. Time to expiration: the more time, the bigger the time premium. (That wasn't so hard.)
  2. Volatility of the underlying asset: the riskier the currency, the bigger the time premium (the Peso usually has bigger time premiums than the Swiss Franc). Remember, options are analogous to insurance and a risky driver usually has to pay a higher insurance premium.
3) Degree that the option is in-or out-of-the-money: Simply put, the option with the smallest TP is one "at-the-money" At the two extremes, however, the TP shrinks: a "deep out of-the-money" option (for example, a 79 cents strike price call), would only have a very small chance of reaching a positive IV before expiration. The cll writing is willing to accept a very low premium for this "long shot". The other extreme, a "deep in-the-money" option (for example, a 60 cents strike price call), would offer little protection to the call buyer (thus little insurance). While the total price would be high, this price would be largely the call's intrinsic value.

Put Option:Looking at the column in green, you could buy an April put for 1.26 cents, 1.56 cents, or 1.78 cents per Swiss Franc. These contracts get more expensive as the strike price goes up., Since a put gives one the right to sell, a high selling price is more desirable than a low selling price. A put is "in-the-money" if it has intrinsic value today.

The intrinsic value (IV) is easily computed: for a put, one simply subtracts the market value of the future from the options strike price. A negative value simply means the intrinsic value is zero and the call is "out-of-the-money".

Suppose the value of the underlying currency future is 71.3 cents, then the IV of the three puts are zero for the 7100, 0.2 cents for the 7150 strike price put and, 0.7 cents for the 7200 put.

The time premiums would be the (price) premium less the IV:

1.26 - 0 = 1.26; 1.56 - .20 = 1.36; and 1.78 - .70 = 1.08 (for the 7100, 7150, and 7200 respectively).

Some things that affect the time premium

1) Time to expiration: the more time, the bigger the time premium.

2) Volatility of the underlying asset: the riskier the currency, the bigger the time premium.

3) Degree that the option is in-or out-of-the-money: Similar to the reasoning for the call option, only reversed direction since a put gives you the right to sell.