Would Trading Options Have Prevented CHF Losses

Education Market Updates Chf Risk Management Volatility

Trading options with no stop-loss would have been a dream for many traders last Thursday when the EUR/CHF went into a free-fall. Buying options prior to the colossal Swiss Franc move last week, in particular the 30% fall in EURCHF price, could have saved traders and their brokers hundreds of millions in losses.

Brokers using ORE’s web solution, optionsReasy, were able to offer no margin call option trading and short covered options with a pre-defined margin. This unique solution prevents a need for a stop-loss when trading. When buying an option, the only risk is the prepaid premium. When selling a covered option, the only risk is the predefined margin. In both these cases, there would not be a stop loss or a margin call event. The trader could choose to close the deal or stay with it until expiry.

Many currency traders speculated that EUR/CHF would rise given that the SNB had publicly announced their plans to protect the 1.2000 floor. Thus, this appeared to be a sensible trade.

No one could foresee what would happen next. The drop to the 0.8696 low saw every long trader on EUR/CHF out of the market and leaving client accounts in negative balances. Brokers, who hedged positions, are now having to pay banks losses which their clients cannot afford to pay.

Let's explore the scenario for those EUR/CHF traders who bought options to speculate an upward move in price.

A day before the SNB announcement, a broker using ORE’s platform saw a trader buy a Call option to profit from a rise in EUR/CHF price. The Call deal size was 50,000 EUR with a 2 week expiry and a strike of 1.20097 (a contract with the right to buy 50,000 EURCHF at 1.20097) which cost the trader a total of 131 euros.

The colossal move had little impact on the option buyer - the total loss amounted to 131 euros, not a cent more. Because when you buy options, the risk is limited to premium paid. If the trader had instead chosen to trade his view in the spot market, he would have gone long by buying a 50,000 EURCHF at the 1.2000 level. In this case, following the SNB announcement the losses would have been approximately 19,000 Euros - 145 times larger!

Last week's events remind us all that we must offer clients more risk/profit diversity when it comes to trading the markets.