The 25 February 2015 option
On 11 December 2014, Ravi purchased a foreign exchange option: “Buy USD/JPY 119.00 CALL Exp 25/02/2015 TOK 500,000 @ 2.12 JPY Pips”, through his forex broking firm.
On 18 February 2015, Ravi called his adviser (Paul) at the firm and was advised that the USD/JPY was lifting. Paul said if he were Ravi, he would hold onto the option and let it run up to 121 and get back 200 pips. The USD/JPY did not rise much higher than 119 by 24 February 2015 (the day before expiry of the option), and did not get up to 121.
Ravi said Paul told him on 18 February 2015 that the USD/JPY was definitely going to go up by around 200 pips, and by following that advice he suffered a loss $11,800. Ravi said Paul’s advice was flawed, and that the broking firm was not authorised to give that advice.
The broking firm said Paul had discussed the option with Ravi on 18 February 2015 and gave his view on what he believed Ravi should do. The advice given was based on Paul’s experience and knowledge of the markets. Further, the broking firm said that, as any investor knows (especially one with Ravi’s experience), currencies are unpredictable and volatile. Ravi sought Paul’s opinion on what was happening in the market and Ravi chose to follow this opinion. The firm said Paul’s actions were appropriate and did not cause Ravi a financial loss.
Ravi complained to FSCL.
The 17 April 2015 option
Ravi also complained about a EUR/USD option spread set up on 19 March 2015 being:
a) Buy 108 EUR/USD PUT Expiry 17 April 2015 (10 million).
b) Sell 107 EUR/USD PUT Expiry 17 April 2015 (10 million).
Option a) was a put option, meaning Ravi was buying the right (but not the obligation) to sell the underlying asset, being Euros at 1.08 USD. This option cost Ravi $145,000 USD in premium. Ravi wanted the market price for the EUR/USD to drop below 1.08 so that he could either exercise the option (that is, sell 10 million at 1.08 and make a profit by selling above the market price), or sell the option itself to another trader.
In part b) of the option spread, Ravi sold the option to the broking firm and received a credit of $95,500 USD. This credit was offset against the $145,000 USD Ravi had paid for part a), meaning the total cost of the option spread was $45,500 USD. Part b) of the option spread did not reach the mark and fell away. The focus of Ravi’s complaint was on part a) of the option.
What happened on the option expiry date?
On the day of expiry (17 April 2015), option a) did not look as though it would reach the mark and Ravi called Paul for a quote on selling it. Paul said that a price could not be provided for the Tokyo cut on the day of expiry, but that he could look at getting a price on the New York cut (which Paul did, and Ravi chose not to sell). The broker also said that Ravi could minimise his loss on option a) by purchasing the reverse option. Ravi took no further action.
After the expiry of the option at 6pm New Zealand time, the broker called Ravi and said that his option had been exercised. Ravi thought the option would be cash settled meaning he would not actually have to deliver the Euros. If the option had been cash settled before expiry, Ravi would have made a profit of between $30,000 and $40,000 USD. Offsetting this against the $45,000 he paid for the option spread, he would have only lost between $9,500 and $19,500 USD. However, after 6pm the cash settlement position eroded to $7,000 USD. Ravi then carried out further transactions to try and mitigate his losses on the option.
Ravi ended up suffering a loss of $34,675.25 USD after he was eventually closed out (because he did not have enough margin to continue trading in an attempt to mitigate his loss). The broker refunded Ravi some commissions it earned on the trades, reducing his loss to $30,995.28 USD.
Ravi complained the broking firm had not disclosed how trades would be settled and he did not consider Paul had the experience to be providing the advice he did. Ravi said Paul should not have suggested he continue to trade further on 17 April 2015 because he did not have the required margin to take these actions. Lastly Ravi said he should have been told it was not always possible to sell options depending on the time of day, when he first became a customer.
Our view on the complaint about the 25 February 2015 option
We said Paul had acted correctly in providing the advice he did on 18 February 2015. This was because although Paul was giving his opinion, he was giving this in relation to a class financial product. The firm’s terms and conditions also confirmed that it only gave advice on class products.
With class products the adviser does not look at the customer’s particular financial circumstances and give personalised advice. The terms and conditions also said that when entering into a trade, the customer agrees they are relying on their own judgment. In addition, it is common knowledge that currency markets are volatile, and no person can predict exact movements in the market.
We did not consider there was any merit to the first part of Ravi’s complaint. It was Ravi’s choice to follow Paul’s advice.
Our view on the 17 April 2015 option
It was correct that the option could not be sold on the Tokyo cut at the time Ravi called on 17 April 2015 because the market was not open. When he became a customer of the broking firm, Ravi had noted that he had at least 5 years of forex trading experience and 10 years of option trading experience. We said it was reasonable to expect Ravi to know that pricing is not always available on certain markets at certain times.
We also did not consider Paul needed to know whether Ravi had adequate margin when giving suggestions about how to unwind the option and minimise his loss. That was Ravi’s responsibility.
Ravi said he had a discussion with Paul a few days before expiry about cash settling. However, we said Ravi needed to actually contact Paul about wanting to cash settle on the day of expiry because, depending on movements in the market, Ravi may want to take different action. If Ravi did not know about this requirement, it was unfortunate, but this was outlined in the firm’s terms and conditions and it was up to the customer to understand these.
We found Ravi was an experienced trader based on his declared experience and also on the basis of our review of some of Ravi’s previous activity with the broking firm, including his telephone conversations in relation to other trades. It was therefore adequate that the broker gave Ravi its terms and conditions. Ravi was responsible for reading the terms and conditions and understanding the process that would be followed if he wanted to unwind an option.
Ultimately, it appeared the cause of the problem was that Ravi had not realised the effect of daylight savings and that the Tokyo cut had changed from 7pm New Zealand time to 6pm New Zealand time since he had set up the option spread. It appeared Ravi thought he still had an hour to tell Paul what he wanted to do with his option. However, when the option expired earlier than he expected, he then suffered a loss.
We considered Ravi was responsible for his losses and did not uphold his complaint.
