A forex exchange option also referred to as a currency option is a financial derivative that gives traders the right to sell or buy currency pairs at a determined price (strike price)on specific days (expiry date). The options are either call or put options. A call option gives the trader the rights to buy the currency pairs while a put option gives the trader the right to sell.
A currency CFD trading is driven by the factors that drive the currency pairs. These factors include interest rates, macroeconomics, geopolitics, inflation expectations and also data like GDP, unemployment as well as business and consumer confidence surveys.
There are two options styles, European and American. The European options can only be used on the date of expiry while the American options style can be used at the strike price at whatever time before the expiry date.
How Forex Options Are Traded
Traders taking part in options trading can make use of (delta, gamma, theta, rhio, and Vega) otherwise known as the ‘Greeks’, as a way to judge the rewards and risks that come with the options price as it would be done for equity options.
An option buyer’s risk is limited to the option buying cost known as the premium. For an option seller, they face potentially unlimited risks but the premium received makes the profit fixed.
Why Should You Trade Forex Options
The most common reason given for trading forex options is to fix short-term spot forex hedges. For instance, if you want to purchase AUD/EUR but think there may be a short-term decline in price, you can go for an AUD ‘put’ option which ensures you profit from the decline and still maintain your ‘buy’. It is also possible for you to sell AUD/EUR ‘short’ the very same time you buy.
There are numerous strategies that can be made use of when it comes to options trading contracts. You can make use of spread strategies used in equity options, which include straddles, vertical spreads, butterflies, and condors.
Forex options can be sold or bought. The prices are usually derived from the currency base. The currency base is simply the first currency in the pair. If the first currency price is moving upwards, you can buy calls and sell puts. However, if the first currency price is moving downwards, you need to sell calls and buy puts.
Accessing Forex Options
Forex options trading contracts are available through OTC (over the counter) market. They are completely customizable and expire at any time. When you go to a spot options market, buying a ‘call’ automatically means that you get a ‘put’ too. For instance, traders can buy one option to get the right to purchase an AUD/USD lot at parity (or 1.00) in 3 months. This becomes an ‘AUD call/USD put’ trade option.
Forex options trading contracts can also be accessed via regulated exchanges which are forex future options. This makes it a simple call or put. Regulated exchanges forex options offer the trader different expirations as well as quoting options with maturities that are standardized. When a trader chooses to trade options on the exchange, the options are availed in ten currency pairs. All the pairs involve the USD and are also settles in dollar cash.
Advantages of Options Trading
Cost efficiency – forex options trading come with a high leveraging power. It is possible for the trader to get a forex option that almost identically mimics a currency position only that the option comes with huge savings.
The risk is less – there are numerous times that traders can use options as a way of reducing risks. They are also less risky for an investor since they only require putting in a very little amount of money as capital.
High return potential – options trading is preferred and loved for their high percentage returns. With options, it is possible to make as much as you put in as capital.
It is a strategic alternative to trading forex – options trading offer the investor various alternatives for investment. You can use a few options to recreate numerous variations and all have almost the same potentials in profits.