Financial markets have a developed infrastructure, and therefore investors and traders can use various tools to achieve their economic goals. This forms an entire ecosystem, which includes commodity, currency and commodity markets, options, futures contracts. But, since each market has only two participants, that is, buyers and sellers, they all have common patterns. Therefore, the option levels and information from the exchange can be applied when trading on the stock market or on the Forex. In the latter case, it is especially useful and has many advantages.
Overview of options and price levels
Forex trading is often called blind trading because the foreign exchange market is decentralized. It is impossible to get full information about the number of traded lots, and a tick volume is used as a criterion for the quantitative assessment of trades. However, it reflects only the number of times that the price has changed over a certain period of time, and not real amounts. And, since the market value is derived from volume, this information should be purposefully sought.
Two instruments of the Chicago Mercantile Exchange are suitable for this - futures volume and option levels. They allow you to see the positions of major market players and adjust to their strategy, moving together. This tactic is called VSA, it has a higher accuracy of entry and allows you to participate in long-term transactions.
Receive Bulletins on CME Option Levels
Bulletin CMEs are hosted on a site server accessed at ftp.cmegroup.com/bulletin/. This folder contains all preliminary reports on financial transactions completed on the previous day of the exchange. The time for the appearance of new data is from 07:45 to 08:40 Moscow time. After that, a final report is issued within an hour before the opening of the American session. Moreover, the bulletin itself is divided as follows: for each asset traded - one report file. The daily newsletter contains about 500 pages of documentation from which the desired asset is selected.
To analyze a specific financial instrument traded on Forex, you should go to the Daily Bulletin page of the official website of the CME Group and go down to the subheading FX. Here you can see reports on the purchase of Put and Call options. To familiarize yourself and evaluate purchases, click on the links Canadian Dollar Call Options and Canadian Dollar Put Options. Here are two PDF files with unprotected encoding, copying information from which is allowed.
Exploring Call Options File
The newsletter header contains general information about the exchange and its contacts, an address and a subheading that indicates the stage of publication of the report. If the title indicates PRELIMINARY, the bulletin is preliminary, and some transactions have not yet passed the clearing stage. If FINAL is specified, then the report contains all processed transactions. At the time of analysis, any of the indicated versions of the document will be suitable, since all contracts that entered the PRELIMINARY bulletin will be successfully cleared.
Then you should go down to the subtitle ADDITIONAL CANADIAN DOLLAR PUTS ** SETT PRICE **. To the left in the STRIKE OPEN RANGE column are published the purchase prices of options for Canadian dollar futures for a specific month. And, since the price of the futures option contract is published in the newsletter, the next month should be chosen as a guideline. For example, in October, for analysis, you should evaluate the mood of buyers of options on futures with an expiration date in November.
This picture is a real Canadian dollar newsletter.To calculate option levels, you should study the columns with volume and open interest. Volume is the total number of closed and open contracts, and open interest is the number of currently active contracts.
Obtaining optional levels and plotting them on a chart
For further analysis, you should choose a quote by the largest volume with a high open interest. And, although the methodology for each trader will be his own, this is indicated only as a demonstration. It may not be a trading recommendation. So, the quote for this group of option contracts is $ 800. This means that at such a price of the contract at the time of the expiration of the Call option, the buyer will close the transaction at breakeven, taking into account the commission. If the price is higher, the buyer will be paid a premium on the option. If lower - he will lose his money.
It is important to understand that building option levels for this figure is impossible, because this is the price in the form of a direct CAD / USD quote. To use the USD / CAD currency pair on the chart, it should be converted. This is done as shown in the image below. Here you should pay attention to the explanation of the specification of the futures option. For each instrument, conversion factors for quotes will vary.
Using obtained level
Having figured out how to calculate the option level, you should learn how to use it correctly. This also has a fundamental subtlety. Attention, a price mark of 1.2499 was obtained, taking into account rounding. At the moment, it is located in the center of the USD / CAD quotation range range. So what is it, expected support or resistance?
Initially, the level was obtained using CAD Call Futures options, which reflects the behavior of CAD / USD quotes. This means that a large mass of traders through the acquisition of options at a price of $ 800 seeks to hedge their positions in sales of the Canadian dollar. Then, if the Forex forecast is incorrect and the price rises, the CAD option will give a profit, and the USD / CAD transaction will be brought to breakeven or with a slight loss. But the hedging transaction protects the main position for the sale of the Canadian dollar, that is, the trader predicts the growth of USD / CAD, on which he wants to make money. This means that the level obtained will be support for the dollar bulls.
The problem of reverse and direct quotes
Such trading at optional levels, when the futures and Forex quotes are inverse, has more subtleties than in the case of direct quotes. For example, Euro futures and the EUR / USD quote, or British pound futures with a pair of GBP / USD does not have such problems. For them, the options received by Call-levels are resistance. The levels of Put options in the pairs EUR / USD, NZD / USD, GBP / USD, AUD / USD should be considered as support, below which the asset should not move.
In the case of the Canadian dollar, yen, ruble, peso and Swiss franc, the logic of level construction and their interpretation will differ. Moreover, such a divergence is not taken into account by any program of option levels, which, supposedly, is designed to help the trader determine the places of capital accumulation.
Auto Render
Effective use of option levels in Forex trading can be simpler if you use automated programs. Their task is to carry out routine calculations by analyzing the CME statistical bulletin. The program independently takes numbers and puts levels on the chart of the trading terminal, draws important zones. The most famous indicators that import data from CMEs are: Olimp, Evolution options, CME OI Levels, CME Vlevels, OpLi, i-SNV_NEW, TST Levels.
The creation of a comprehensive guide to the use of a specific indicator of option levels was not the task when writing this publication. Therefore, to configure the program and interpret the signals correctly, refer to the FAQ section of the official documentation.If such a site is not available, then the indicator should not be considered reliable. A high-quality paid software product should have its own official management and support service.
The vast majority of these advisers extends for money. And to use them you have to pay a subscription. Of course, the work of a programmer should be paid, although he uses free data from an open source. But this information is obtained very simply and without money.
Benefits of manual analysis of CME levels
To get a reliable trading signal, it is enough to independently analyze the data in the newsletter and compare them with monthly or weekly. This will significantly increase the level of understanding of the market and its current moods. Of course, then the trader will have time to analyze only a few tools. But he will understand them perfectly and will increase the percentage of accurate entries. But it’s impossible to simply consider existing levels and call yourself a currency strategist. It is possible that the levels drawn by the automatic adviser do not adjust correctly to the delta of your broker. And that makes them useless.
Auto Expert Advisor Issues
Since CME is an exchange and officially trades in contracts, there may be differences between Forex quotes and their data. They are not in the general configuration of price bars, but in the quotation indicator at a certain moment. Often there is such a difference in two different Forex brokers. And in the case of stock quotes, there is always such a difference. Therefore, one of the necessary elements of the automatic level indicator functionality taken from option contracts is the ability to indicate this difference in the form of a delta in the start settings.
Since there are a huge number of indicators written simply by illiterate people or scammers, the presence of a delta should be taken as an indicator of a normally functioning program. All others are nothing more than a hoax. Also, despite the automatic adjustment, you should periodically independently verify the real numbers with those provided by the indicator.
Hedge Option Levels
An important point. Using the optional levels in Forex trading, you should clearly understand why large financial institutions need them. More precisely, one should understand whether the transaction on the exchange was speculative, hedging or investment. Indirectly, this can be judged by the volume of the transaction, which is published on the CME in the daily bulletin. However, such information cannot be regarded unambiguously and is capable of harming an inept trader.
If a financial institution bought a large option, then its purpose may be to generate income or reduce risk on open speculative positions. And the options market is great for the latter, that is, for quick hedging. Therefore, the analysis of option levels that appeared as a result of opening a hedging transaction will lead to an error. This is due to the fact that the transaction on the purchase of a large insurance option was concluded with the aim of making a profit if the main position in the stock market or Forex incurs losses.
Hedge Option Example
This action should be considered on the example of futures 6E (Euro) and its corresponding option EUR / USD. For example, the analytical department of a large financial institution expects the euro to grow and opens a series of transactions for the purchase of EUR / USD or 6E-futures. In part, hedging of risks is implemented through the currency futures contract, while additional risk elimination is achieved by purchasing the Put option EUR / USD. A put option is a contract to drop quotes, in this case, to reduce the euro and the growth of the US dollar.
The result of this series of transactions is the natural profit. For example, the main forecast was correct and EUR / USD is getting more expensive.Then the trader made a profit, and the option will be lost, but his loss will not affect the total income, as it will be much less than the resulting exchange differences. But if the EUR / USD quotation instead of growth became cheaper, then the foreign exchange position was gradually withdrawn from trade as the market situation changed, and a certain loss that was not critical for the trader was formed on it. However, due to the presence of the purchased Put option, the fund again made a profit.
Recommendations for traders
Given this information, you should review your strategy for using option levels at Forex. Firstly, it is necessary to formalize the criteria according to which the option transaction will be regarded by the trader as speculative or hedging. Secondly, price zones should be determined based on the current quotes of the futures market.
Only a clear understanding of market sentiment and the potential movement of a financial instrument, and not the use of an indicator of option levels, can provide profits at Forex. But you can’t use them directly as landmarks. Option levels, like any other, are just a place where you can place a statistically winning stop order and where there will necessarily be some kind of price reaction. But as the main criterion for opening a transaction, their use is impossible.