Thread: Oanda Box Options

The Odds in American Roulette with the advent of the 00 on the best wager of odd or even or black or crimson are 4.77% into the home This looks like fun, but in reality, at a little over 21% into the home, one will be better off hitting the slots Those range from at best 5% to 25 percent in favor of their home...

I don't see why it'd be fun to play with a game you cannot win. .

IMHO Scott

They're carnies! Small palms. Smell like cabbage.

While I understand Oanda was keeping 21 percent for themselves on that previously mentioned commerce, you can not compare it directly to roulette i.e. a match with readily calculated chances. If the market were really easy to compute chances, there are so many winners because it'd all come down to money management.

While I am not planning to go perform Oanda box alternatives, it's possible there's a way to make money.

Originally Posted by ;

Hello Everybody,
I only attempted to price the identical box at oanda's demo account and this is what I got:
Strike box: Pay $1000 for a payout of $1707.04
Miss box: Pay $1000 for a payout of $1396.62

Now there are just two possible outcomes for it particular, either the box is hit or it isn't, and so according to oanda's rates the probability for each outcome is:
Pr(Hit) = 36.94percent
Pr(Miss)=41.73percent

Now these two do not sum to 100% and so Oanda includes a 21.33% margin! I.e. in the long run they aim to make a 21% profit in their box choices (supposing of course that buyers of those box choices simply predict where the market is going with 50% precision ).

In fairness to oanda that is still better than the local bag which includes a margin of approximately 35% on sports matches this weekend.

Still seems like gaming to me personally though.

Hi,

I run a website that deals almost exclusively with odds and statistics applied to the FOREX market. I noticed a couple of issues with this analysis, and wanted to try to clarify them. Among the issues is logical, the other factual.

First of all, you are using what I refer to as the fundamental equation of trading to figure out the probabilities. In other words, in breakeven the win rate must be equivalent to the risk divided by the sum of this risk and the potential gain. W = R/(R G). By way of example, if I stand to lose $100 or profit $300, my win rate at breakeven must be 100/(100 300) = 25%. I am only explaining this to the sake of others that might not know where you came up with both probability figures. The P(hit) = 1000/(1000 1700) = 37%. ) I am with you up to now.

But taking the difference between the sum of the probabilities and 100% as Oanda's edge is where you lost me. Allow me to illue with an example. Suppose Oanda's payout had been $4000 for both boxes. A greater payout could LOWER their advantage right? Not according to your method. The 2 probabilites would then be:

P(hit) = 1000/(1000 4000) = 20%
P(miss) = 1000/(1000 4000) = 20%

So now the sum is just 40%. Does this mean Oanda's advantage is 60%? Of course not. In the event the payouts were both infinite, both probabilities are zero, and in accore with this logic Oanda's edge would be 100%.

Here is where I think that the problem came in. In Oanda's system, they use the term payout to spell out the entire sum that is paid to the box owner if it's hit or overlooked. Including the buyers original price. In the case where the hit box costs $1000 and pays out $1700, the potential profit is ONLY $700. You pay your $1000, and whether the box hits you get your money back and another $700. This changes your probability calculations to (I am rounding everything):

P(hit) = 1000/(1000 700) = 59%
P(miss) = 1000/(1000 400) = 71 percent

These include up to 130% and the fact that it is GREATER than 100% suggests they have an advantage. The cause of that is that they are pricing that the hit box AS IF the probability of a hit have been 59 percent. In reality, the probability is lower, but by pricing it this way they are (in a sense) claiming that I'm going to win more frequently than I really am.

Finally, the best way to determine their real financial advantage is to take the amount by which the probability sum exceeds 100 and divide it by two. In this instance it's (130% - 100%)/2 = 15%.

Another way to determine why it's 15% is to imagine what could happen if I simply bought BOTH of the boxes. Like you said, one of them is a winner. Well, if I do that then I invest $2000. But what's my very best case scenario now? It is becoming a win on the HIT box that would pay out $1700 back to me. So for every $2000 I invest, I can only get back $1700 (max) and Oanda keeps the other $300. Their take is $300 for every $2000 I spend, or 15%.

Hope I didn't make everyone's eyes glaze over, LOL. Just wanted to clarify the math on this one.

Originally Posted by ;

Hi,

I conduct a website that deals almost exclusively with odds and statistics applied to the FOREX market. I discovered a few problems with this analysis, and wished to attempt and clarify them. One of the problems is logical, the other factual.

First of all, you're using what I refer to as the fundamental equation of trading to find out the probabilities. In other words, in breakeven the triumph rate has to be equal to the risk divided by the sum of this risk and the possible gain. W = R/(R G). For instance, if I stand to lose $100 or profit $300, my win rate at breakeven has to be 100/(100 300) = 25%. I am only explaining this for the benefit of other people that may not know where you came up with the two probability figures. The P(hit) = 1000/(1000 1700) = 37%. ) I am with you up to now.

However, taking the difference between the sum of the probabilities and 100% as Oanda's edge is where you lost me. Let me illue with an example. Suppose Oanda's payout was $4000 for both boxes. A higher payout would LOWER their edge ? Not based on your own method. The 2 probabilites would then be:

P(hit) = 1000/(1000 4000) = 20%
P(miss) = 1000/(1000 4000) = 20%

So today the sum is just 40%. Does this mean Oanda's edge is 60%? Of course not. In the event the payouts were equally boundless, both probabilities would be zero, and in accore with the logic Oanda's edge would be 100%.

Here is where I believe that the difficulty came in. In Oanda's system, they use the expression payout to spell out the entire amount that is paid to the box owner when it is hit or missed. This includes the buyers first price. In the case in which the strike box costs $1000 and pays $1700, the possible profit is ONLY $700. You pay your $1000, and whether the box hits you get your cash back and another $700. This affects your likelihood calculations to (I am rounding everything):

P(hit) = 1000/(1000 700) = 59%
P(miss) = 1000/(1000 400) = 71 percent

These include up to 130% and the fact that it is GREATER than 100% indies they have an edge. The cause of that is they are pricing that the hit box as though the likelihood of a hit have been 59%. In fact, the probability is lower, but by pricing it in this way they are (in a sense) asserting that I'm going to win more often than I actually am.

Ultimately, the way to ascertain their actual financial edge is to select the amount by which the likelihood sum exceeds 100 and divide it by 2. In this instance it is (130% - 100%)/2 = 15%.

Another way to determine why it is 15 percent is to envision what would happen if I simply bought BOTH of the boxes. Just like you mentioned, one of them is a winner. Well, if I do that then I spend $2000. However, what's my best case scenario today? It's getting a win over the HIT box that would cover $1700 back to me. So for each $2000 I spend, I can only get back $1700 (max) and Oanda keeps the other $300. Their take is $300 for each $2000 I spend, or 15%.

Hope I did not make everyone's eyes glaze over, LOL. Just wanted to describe the math on this one.

lol. . Did it take you a bit over a year to figure that out??

Just joking. . Thank you for clarifying though. .

If you calculate the implied vol in the price of the options you will see they arent actually that bad. If you dont understand the market dont exchange it. You wont have a tendency to discover many fx alternative specialists even inside the banks that will trade them outright. Trading the gamma whilst hedging the underlying spot is the easiest of choice plays to Earn Money

Originally Posted by ;

lol.. Did it take you a little over a year to figure out that??

Just joking. . Thanks for clarifying though. .

LOL, it took a lot longer to write the article than it did to find out the mathematics. I am a geek of course...

Originally Posted by ;

should you compute the implied vol from the price of the options you will see that they arent actually that bad. If you dont understand the market dont trade it. You wont have a tendency to discover many fx option specialists even within the banks that will trade them . Trading the gamma whilst Assessing the underlying place is the simplest of choice plays to make cash

Maybe some different tips for somebody who does not understand the market is to come into a forum such as this one and ask questions. So here's one.

From the securities markets, option pricing is explained by the Black-Scholes model that takes as inputs the underlying security price, hit, risk free return, time to expiration and volatility. Since the first four are understood, and also the option's market price is understood, it is possible as you said to back-solve to your volatility (although it needs to be done iteratively instead of algebraically because the Black-Scholes formula uses a cumulative distribution function).

Anyway, delta is merely the change in the option value concerning the shift in the underlying security value, and gamma is basically the derivative of that. In any case, all of these option greeks are ultimately derived from the inputs I listed above.

The question is, how exactly would this translate over into Oanda's box options? The basic theories like call vs. put and in the money/out of the cash don't translate along well.

For instance if I have a box choice from 130.40 to 131.00 and the EUR/USD is at 129.00 I would make money when the price rises. So that appears to be a call. But if my box is four days in the future and the price rises to 132.00, then the price is too high and I make money when it drops. So has my call now abruptly changed into a put? Also, if I have a box that begins 2 days from now and finishes 4 days from now, what is my time to expiration; 2 days? 4 days?

Ultimately, the Black-Sholes and the derivative greeks such as delta, gamma, theta, rho and vega are all dependent on the idea of the option's potential inherent worth, or the value obtained from exercising the option. There is not any such thing to get a box choice. I don't have the right or the duty to receive or offer up a position in a currency pair predied on my box choice position.

So using a derivative concept like gamma for box options is mystifying to me because even the fudamental theories like put/call, inherent worth, ITM/OTM don't even apply. Maybe an actual example of how you compute the gamma on a box choice and also trade that the gamma would be useful.

Thanks!

IMO Oandas Box-Options are quite great. Trading them is not quite as clear as trading spot tho, and require an understanding of choices. Interested folks should google for newspapers about american barrier no touch one touch binary option. Google comes up with quite some interesteing strikes.

The interesting thing about choices is that they allow much more complied egies than just directional trading. A very easy example is a long volantility egy for news-trading using a miss-box. This would have the additional advantage that choices arent subject to slippage and wide spreads, which spot-trades are plagued during news.

You loose a few advantage to oanda, but much more like 2% to 3% and not 15. The downside is, that the resale is the majority of the time not worth it. This could possibly be due to how oanda utilizes discrete strikes using a 5 minute resolution due to their alternatives, there's no secondary market for this type of product, they have to take back them themselfs everytime.

Capitalist88: read those papers about exotic options or use a service such as superderivatives.com to get optionprice calculations.