Part 2: Time / Diagonal Spreads For Trading Forex Options

If the stock from trading forex options were to close above $25.00, then the September 25 call would close in-the-money. At that time, you would be assigned your short September 25 call and that would translate into a short stock position. That short stock position that you received from trading forex options and the assignment of your short September 25 call along with the remaining October 25 long call position is the equivalent of a synthetic put. At this time, you could close out the position or keep it.

The position is a bearish one so if you felt the stock from trading forex options would be heading down, you could keep the position on. You could find yourself trading forex options of a different strike to set up either a bull or bear put spread. You could buy the October 25 call to create a long straddle. As you see, there are many different combinations that could be created.

If you were short the September / October 25 call time spread and your trading forex options expired under $25.00 on expiration Friday of September, then you would have a remaining position of a short October 25 call naked. Again, there are many potential ways of continuing the position. Of course, you could always buy back the naked call from trading forex options and close the position if you no longer wanted to maintain a position in the stock.

If you did, you could buy a call in the same month and create a vertical spread, sell the corresponding put and create a short straddle, continue trading forex options 1 to 1 and create a buy-write or other combination based upon what you felt the stock would do.

If the stock from trading forex options closed above $25.00 and you were short the call time spread, then you would be left with a long stock position from your long September 25 call and short the October 25 call against the long stock position. The position you would be left with is a buy-write. Depending on your outlook for trading forex options, you could keep the buy-write on, take it off, or use other options to change the position to what you want it to be.

Trading Forex Options & Rolling Put Spreads

As far as put spreads for trading forex options, let’s take an example and see where we are when the front month option expires. We will use the September / October 25 put spread for our example.

When long the spread, and trading forex options closes above $25.00, the September 25 puts, which you are short, will expire worthless leaving you with a long naked put position. From that position, you can close it or combine it with other option or stock to create a different position for trading forex options. Again, there are many different possibilities.

If you were short the put time spread, and trading forex options closed above $25.00 then the September 25 put, which you are long, will expire worthless leaving you with a short naked put position in the October 25 puts. This position can be closed out or combined with trading forex options or stock to create a strategy that will take advantage of the outlook you have on the stock.

When trading forex options closes below $25.00, the scenario is different. When long the spread with the stock closing lower than the strike price, the front month put which you are short will be assigned to you thus making you long stock in addition to your long October 25 put. This position is known as a synthetic call.

As before, there are many ways to combine other options and/or stock to change the trading forex options position so that it is in line with want it to be going forward.

If you were short the trading forex options spread, and trading forex options closed below $25.00, then you would exercise your long September 25 put making you short stock and short the October 25 put. That position, which is called a “sell-write” (the sister strategy to the buy-write), can be kept as is, closed out, or changed in different ways by combining it with stock or other options based upon your expectations of trading forex options future movements.