FxWirePro: Affinity between EUR/JPY vanilla versus exotic options using delta factor

In this write-up, we run you through the comparative analysis between vanilla and one-touch options spotting out the difference between EURJPY vanilla and one-touch options.

When you look at the above nutshells, as compared to EURJPY vanilla calls and puts, exotic options enable traders to leverage profit from simplified yes-or-no predictions. 

Between two possible outcomes, if a trader upholds such options during the course of expiration and if the target price is reached, then the trader is entitled to the full premiums.

Please observe the delta of both sides, exotics have an exorbitant delta, whereas, vanilla options have reasonable delta around. 

In the above trades’ sensitivity table, one can easily make out the Delta expressed as an amount in the base currency of the pair you are trading which is in Euros. This Delta value is simply a percentage of the option’s total amount. If the EURJPY call option has trade amount 100,000 EUR and a Delta of about 50%, then the Delta in Euros is 50,000 (50% of 100,000), in exotic options, you will have attractive delta as you can see above nutshell.

But these digital options have no time value when it is in the money (ITM) and should be exercised immediately. In a barrier option, it is essential to define not only the type of barrier (knock-in or knock-out) but also the direction of the barrier (up or down).

If the expiry is not near, the delta movement wouldn’t be 1-point increase with 1 pip in the underlying spot FX. Which means if the spot FX moves 1 pip, depending on the strike price of the option, the option would also move less than 1. Thereby, in the money put option with a very strong delta will move in tandem with the underlying.  

Depending on the delta value, one can select the trades using knock-in or knock-out barrier options. Exotic options are customized and the price wouldn’t standardized, whereas the vanilla options are standardized and these are comparatively cheaper. Courtesy: Saxo

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing at 58 levels (which is bullish), JPY is at -37 (bearish) while articulating (at 10:52 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex