I am with a marketmaking/prop equity options operation, and would like to find out about the specifics of trading FX options as compared to their equity counterparts. The obvious differences seem to be it's easier to short FX, and there's more liquidity and smaller spread; the smile, at least between major currencies, is not as dominated by the skew; plus there is the additional tetrahedral relationship between correlations/vols. What else is there? Can somebody recommend any books/papers/howtos on the specifics of FX options, for someone who knows about options as such?Much obliged.

I'd go with Wystup's "FX options and structured products" as a good reference.

FX Options and Structured Productsis available from the Wilmott Bookshop.

QuoteOriginally posted by: ZmeiGorynychI am with a marketmaking/prop equity options operation, and would like to find out about the specifics of trading FX options as compared to their equity counterparts. The obvious differences seem to be it's easier to short FX, and there's more liquidity and smaller spread; the smile, at least between major currencies, is not as dominated by the skew; plus there is the additional tetrahedral relationship between correlations/vols. What else is there? Can somebody recommend any books/papers/howtos on the specifics of FX options, for someone who knows about options as such?Much obliged.Ok as one who has traded both, here is my impression:Equity derivatives traders can appear very naive to FX derivatives traders in terms of their risk understanding - this is not all to say they are not smart. Rather it is a statement about how the FX ad Equity markets have developed.FX kept by and large the same old products and dissected the risk inifinitesmally - with tightest spreads you can imagine that was a need. The current model in flavour for G-11 currencies is a stochastic-local vol model, which is of course also highly limited. In many currencies, TRY for example, you often use either a hybrid-FX model, or you try to come up with intuitive corrections. Back to risk understanding: In 2004 I had arguments with equity traders telling them when/if the Equity skew could invert. But apparently it was an equity dogma that it could not. In Asia though I am now told short dated skews are no longer for the downside on some indices - exactly for the reasons I predicted. As well at least the guys Iknew vehemently denied the existence of a correlation skew - but after 1 week exposure to equities (no papers) I was convinced from simple risk arguments that it must be so. Not so until these gentlemen see papers published.FX derivatives trading is more about subtler technical understanding of risk than in equities. Equity derivatives traders come across more as structured pricers than risk traders to FX professionals. But that is due to the luxury of businesses being able to access spreads 20 times those available in FX markets. Even my (smart) junior FX trader knew about how to incorporate Dvolga/dVol 2 years ago - its an impact on the pricing of exotics. This is just a statement about how the relative markets have developed. Equities have often been led by quants, and structurers, FX quite often by risk traders. In equties, it seems there is an academic/quant community leading the way - practioners listen and follow. FX has had people who have learned doing the business.I have always felt it would be good for FX traders to spend some time in Equities to see how smartly new products are stuctured. And for Equity traders to spend time in FX to see how technical aspects of derivatives trading and risk management are understood in intuitive terms.My advice would be to forget books and papers - and put on a few positions. The best way to learn - the best pedagogical book is inside your head.

Ah, thanks a lot - exactly the kind of response I was hoping for. In fact, our style in equity vanillas is very close to your philosophy - learn from the market, not from 'literature', because how would 'literature' know better? QuoteIn Asia though I am now told short dated skews are no longer for the downside on some indices - exactly for the reasons I predictedAnd what reasons were those? I'd really appreciate if you could elaborate.I certainly plan to play with FX options firsthand, but looks like in the next several months my hands will be too full with making our equity vanilla prop stuff pay enough to afford some exploration

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If I am not wrong, FX options are OTC contracts. Are they available for retail investors to trade? Also, I have traded equity options for last few years. I think it is better to trade options than reading about them. But I would still like to know a good book related to FX options, if someone can recommend. Thanks.

more exotics?

I thought equity traders were looking at dvolga/dvol all the time (variance have become an asset in equities), VIX and options variance on SPX trade with 50 bps bid/offer on 35-40 vol asset (SPX), last time I checked USDJPY vols were trading 1-2 vol wide on 11 vol asset. Also correlation skew in equities have been understood more than a decade ago just check out index skew, options on skew and kurtosis products, etc. FX has no discrete dividends, have very limited variety of structures (no cliquets, limited variance and vol swap market, no dividend options and hence no need for dividend modeling, interlink with credit (jump to default, convertible bonds), no american exercise features on most (worst of 5 assets with knock out barrier with early call feature that's popular in Asia)). However, what FX does have is interesting quanto and triangular relationships which can be challenging for someone in equities. MSFT call options that pay in MSFT shares, etc.

QuoteOriginally posted by: vbprogrammerIf I am not wrong, FX options are OTC contracts. Are they available for retail investors to trade? Also, I have traded equity options for last few years. I think it is better to trade options than reading about them. But I would still like to know a good book related to FX options, if someone can recommend. Thanks.You are correct, they, as of now, all trade OTC (and usually only OTM options, as far as I know), and are not available for individual investors to trade, unless you can trade them on like an Interactive Brokers account. I know you can trade spot/futures/NDFs there, but not sure about options.