BUZZ-COMMENT-Cost-effective options to capitalize on more USD Strength

Jan 13 (Reuters) - FX option markets have significantly increased the price of options that can hedge FX volatility and USD gains, especially versus EUR and GBP. However, there are various options that can be purchased at a reduced cost and would still allow holders to participate in any further USD gains.

Simple vanilla USD call options allow holders to buy the USD on a predetermined date, level, and amount, for an up-front premium. But the price of these options has increased beyond what many investors might think reasonable on a risk versus reward basis.

Adding a knock-out trigger at a chosen spot price below the vanilla option strike price to buy the USD, will significantly reduce it's up-front premium. That's because the trigger level, if traded any time prior to expiry, will knock the vanilla option out of play and it becomes worthless.

GBP/USD has seen solid demand for GBP put/USD call options with strikes between 1.2000 and 1.1500. With GBP/USD spot at 1.2125, a regular 1.2000 vanilla GBP put/USD call with a 3-month expiry has a premium of 205 USD pips and therefore needs GBP/USD to be below 1.1920 at expiry to break even.

But add a 1.1500 knock-out trigger and that premium is reduced to 25 USD pips - profit if spot below 1.2120 at expiry - but only if 1.1500 has not traded prior.

Shortening the expiry date, moving the strike further from the spot price and closing the gap between strike and trigger will reduce the premiums and vice versa.

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(Richard Pace is a Reuters market analyst. The views expressed are his own)

((Richard.Pace@thomsonreuters.com))