Tema: Can carry trade interest pay for long option premium?

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{quote}, gracias por esto. ¿Conoces los mkts donde esto todavía es posible?

Bueno, las opciones a largo plazo que involucran las monedas de financiamiento tradicionales (por ejemplo, JPY y CHF) es donde esto generalmente se mantiene. Y no, una operación que Colm estaba describiendo no implicaba comprar al contado y usar el acarreo real para compensar el costo de la opción como alguien sugirió. Eso sería bastante tonto. Significa simplemente lo siguiente (estos números no son reales): digamos que compro 2y CHFNOK 6.0 put; el cajero automático fwd está en 6.625 mid y la opción cuesta 1.5%. Suponga, por la razón que sea, con el avance del cajero automático de 1 año en 6.495, las opciones de venta al 6.0% de 1 año cuestan actualmente el mismo 1.5%. En este caso, la diapositiva (podría estar tanto en la estructura de términos de los fwds como en el vol) paga completamente por 1 año de mantener la opción, lo que hace que la opcionalidad sea gratuita. En realidad, generalmente necesitas ir más lejos y usar algunos cruces EM realmente jugosos para obtener ese efecto. Los almuerzos gratis no son comunes.

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i actively trade forex options.... there should be several posts of mine on the subject..... can never ever remember noticing receiving or paying swap/interest on any trade.... options just don't entitle you to interest or dividends.....

right, there's no outright swap via derivatives because you are not buying/selling the underlying, only the right to buy/sell...

i actively trade forex options.... there should be several posts of mine on the subject..... can never ever remember noticing receiving or paying swap/interest on any trade.... options just don't entitle you to interest or dividends..... half suspect what o'shea meant by buying calls in currencies with a carry was they were long the audusd by spot trades and at the same time were long via calls.... so the carry trade help out with the price of a call..... such as, being long 10 standard lots of audusd and being long 2 'aum' calls..... using the swap to cover much of the long calls cost....... 'aux' moves inverse of the spot price so it could not be used and also the bid/ask spread will kill ya..... the spread on the 'ndo' is equally high...... for this to work the swap would need to be high and the trades lengthy.....h

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Yes, carry can help offset the cost of the option (it's not actual physical carry, in this case, but rather the term structure of the forwards that is implied by the positive carry). It's relatively rare, however, that this carry fully offsets the cost of the optionality, as that would be a free lunch. Still, it happens sometimes and there are some markets even now where this is the case (very hard to take advantage of). And no, to my knowledge, AUDUSD isn't one of these mkts.

Martinghoul, thank you for this. Do you know the mkts where this is still possible?

Yes, carry can help offset the cost of the option (it's not actual physical carry, in this case, but rather the term structure of the forwards that is implied by the positive carry). It's relatively rare, however, that this carry fully offsets the cost of the optionality, as that would be a free lunch. Still, it happens sometimes and there are some markets even now where this is the case (very hard to take advantage of). And no, to my knowledge, AUDUSD isn't one of these mkts.

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someone correct me if I'm wrong, but there's no carry in the derivatives trade - if you want the benefit of carry you'd need to be trading directly the spot fx or swaps.

That's why I don't get how ColmO'Shea is able to place these trades for his hedge fund.

someone correct me if I'm wrong, but there's no carry in the derivatives trade - if you want the benefit of carry you'd need to be trading directly the spot fx or swaps.

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As you are purchasing an option to buy an instrument at some point in the future, then you will not own it until the expiry time, if you exercise the option. So I don't see that you can receive interest for the period that you don't own the instrument.

That's what I thought until I read this line in Hedge Fund Wizards:

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We did a lot of our trades through options??? positions like buying calls in currencies with a carry because the positive carry paid for your option.

This is from the interview with Macro trader Colm O'Shea. I am guessing these might be options that retail traders do not have access to? But apparently it can be done.