Broker thinks inside the box

In early August, currency brokerage Oanda launched a currency options product that expanded the small but growing field of forex trading firms offering forex options to retail traders.

Oanda says its BoxOption product is an “exotic cross between a binary option (a cash-settled option that either pays a fixed amount or nothing) and a corridor option (an option that pays off based on how long the underlying remains in a predetermined ‘range’).”

Traders use a computer cursor to draw boxes around expected future price targets or resistance or support levels, request an instant price quote, and then buy the option when, and if their choice is met. Afterward they can watch the exchange rate progression in real time.

The customer’s return is determined by the size and position of the box — the lower the probability the box will be “hit” or “missed” (the customer chooses before the trade), the higher the return. If the exchange rate crosses a “hit-box”, the customer receives the fixed return for each dollar invested.

There is no return if the exchange rate misses the hit-box, says Michael Stumm, president of Oanda. And if the exchange rate misses a “miss-box,” the customer receives the return. Non-expired box options can be sold back to Oanda at the displayed resale value.

“[We think] this will allow traders to hedge exchange rate risk and currency positions, and direct investing in the movement of the currency markets,” Stumm says, adding that 90 percent of volume in the currency market is intra-day.

“The maximum loss for the trader is the price of the box, but with a predetermined return in case of a hit or miss,” Stumm adds.

Oanda says the product can be set for time periods of five minutes up to 50 days.