Part 1: Time / Diagonal Spreads For Trading Forex Options

Time spreads are unlike all the other strategies we have discussed before when we talk about rolling or continuing the position for trading forex options. In other strategies, the option component is limited to a single month. At expiration, the position disappears. It either transforms into stock or expires worthless leaving you with no option position. It is different in the case of a trading forex options time spread because you are dealing with two different expiration months. After the front month expires, in addition to a potential stock position, you will still have an option position – the out-month option will still have time until expiration. To properly roll that position, you must first understand the new position you have inherited from trading forex options.

Trading Forex Options Rolling The Call Spread

Let’s look at trading forex options and the call time spread first. For the purposes of our example, let us pretend we are long the September / October 25 call spread. If our trading forex options were to close below $25.00 on expiration Friday of September, the September 25 calls would expire worthless and you would be left with a long October 25 call position. From this position, you would have several things that you could do.

First, you could just sell out the October 25 call. Hopefully, the combination of the expiration of the September 25 calls and their subsequent worthlessness along with the proceeds gained from the sale of trading forex options and the October 25 calls after September expiration might make a profitable trade.

You could keep your trading forex options position open and continuing in several ways. You could stay long the October 25 call naked. You could sell the October 30 call and become long the October 25 / 30 vertical call spread if you are bullish. You could be trading forex options and sell the October 20 call and become short the October 20 / 25 vertical call spread if bearish.

You could buy the October 25 puts and become long the October 25 straddle if you felt that trading forex options could become volatile. You could even sell the stock accumulated from trading forex options and create a synthetic put if you were very bearish. There are ways to create a new position that reflects any possible future outlook an investor can have.