The end of an eventful week, and the end of the year for most trading. Few new positions are taken out in the interim between Xmas and the New Year, and the only real business is from customers, who in my experience always seemed to come up with something awkward! Next week was the time for admin but also thinking about those unlikely option plays that cost you only a small amount , but could, just possibly, pay large in the coming year – a time to let imagination run riot (well almost!!) and compare the cost of a strategy to the likelihood of it happening. The process was to think at the extreme ends of the bell curve of probability about events that were possible in the coming year, if certainly not probable. This process was quite a lot of fun, but some ideas about what was possible in the coming twelve months defied anyone`s ability to build a structure around – but that is a totally different conversation!! In today`s money, the sort of suggestion that could usefully come out, might for example be about Germany leaving the euro or the UK opting out of Europe altogether!
It always helped, and made more sense when a scenario was – by nature of the beast – extreme, but had a base in a more possible, not so extreme circumstance. Again for example, if Germany leaving the euro is almost certainly not going to happen next year, the odds are shorter against ANY currency leaving. So one tries to construct a trade so as to factor in the extreme, but make a profitable outcome that bit more likely, if still a long-shot. There is naturally a price to pay for `more likely`, and it is this equation between likelihood, price and value that is the judgement.
Personally, whether such trades were eventually put on or not, it was always constructive and instructive to find out how much for example a cable put option, or a cable call at strikes of 1.50 and 1.80 respectively cost, and then consider what could be done to enhance a strategy built around a premise involving any such sharp move . The danger was and is, over complication. Half of this exercise was just to think a little more freely, and consider what could just possibly happen and what effect that event would have on the FX market, rather than getting carried away about building an elaborate structure around it.
Always remember KISS (Keep It Simple Stupid) and you won`t go far wrong! I much prefer that notion to the widely quoted Da Vinci, `Simplicity is the ultimate sophistication`, sound`s a bit up his own Rolf to me…..
Happy Xmas to all those sensible people shutting down until the New Year, and here`s to a fantastic – and possibly extreme – 2014. Cheers.
