A popular "Trump trade" option to hedge USD strength
Nov 28 (Reuters) -There are some dominant trades going through the FX option market since Donald Trump won the U.S. election, with USD calls, particularly against the euro, among the most favoured.
A USD call option grants the holder the right to buy U.S. dollars at a predetermined strike price and expiry date in exchange for an upfront premium. If, at expiry, the FX spot rate is less favourable than the strike price, the holder can exercise the option, profiting from the difference between the strike and spot price (minus the premium paid). Conversely, if the spot rate is more favourable than the strike price, the option is not exercised, and the holder's loss is limited to the premium.
Many USD call options include knock-out triggers to reduce the upfront premium cost. For example, USD calls against the EUR with strike prices below 1.0500 are particularly popular. These options often have knock-out triggers set several "big figures" below the strike price, depending on the maturity. For those expiring in early 2025, many triggers are positioned below parity.
While attaching knock-out triggers reduces the premium compared to options without triggers, it limits profit potential to the trigger level. Additionally, the option becomes void if the trigger is touched at any point before expiry.
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(Richard Pace is a Reuters market analyst. The views expressed are his own)
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