Ichimoku Kinko Clouds

So far we have just considered strategies that involve buying options, but bankers are more likely to be writing options. This is a bank’s natural business; they tend to buy options only to hedge existing positions, to reduce exposure, or as part of a more complex trade. The first decision when writing a call is where to pitch the strike. Strikes at new highs and new lows tend to be slightly more expensive but, as few Western people know where the Clouds are, we can use these as well as new highs and lows. Strikes at the top of the Cloud could and should be more expensive, while those within the Cloud can be pitched more cheaply. This is because the market is likely to get stuck inside the Cloud (if it is thick), using up time value. Theta (time decay) is the option seller’s friend. The second decision is when to hedge the call as it moves into-the-money. Let’s consider the example below. Short call strategy Assume we have sold a C$ 1.4000 call on the US dollar (put on the Ca

Long call strategy This is a good example for a cautious trader who wants to buy an out-of-the-money option. In this example the investor anticipates that the Australian dollar would increase in value versus the US dollar. The chart is of the number of US cents needed to buy oneAussie dollar (the level here is 0.6650, so 66 1/2 US cents). The higher the price, the stronger the Aussie. Believing it should move higher, the trader therefore wants to buy an Aussie call (the same thing as a US dollar put). First, check the Cloud and make sure the candlesticks are above the Cloud. If they are not: wait, as a lot of time value may be eroded as prices can stick under the formation for several weeks. Here the Aussie dollar did for almost two months! If they are nudging into the Cloud, and the trader really cannot resist the urge to buy, choose a call with a strike at the top edge of the Cloud and preferably above it (to the nearest round number as these are more actively traded and ther

One does not have to be a rocket scientist to understand how important price and time are in options strategies – even more so than when trading the underlying instrument. If the expiry date is too early, potential gains may be seriously curtailed or non-existent, as one has not allowed enough time for the move to map out. Choose the wrong strike price, and the market may never get there. Buy an option before an interim high or low is clearly in place and you may suffer a massive drawdown in the value of the option, plus time decay, before things then start moving in the right direction. Option buyers The timing element for both buyers and writers of options is very important. Buyers will tend to avoid initiating a trade if it looks likely that prices will move sideways for some time. In a trending market the buyer should analyze the most recent pattern, work out the price target and likely date target, and buy an option with the appropriate strike for expiry just after the day