Many masses remember the breed commercialise when they entertain options. Nonetheless, the alien rally marketplace besides offers the chance to deal these unequalled derivatives. Options dedicate ret traders many opportunities to restrain endangerment and increment gain. Hither we discourse what options are, how they are victimized and which strategies you can use to net.

Types of Forex Options

Thither are two basal types of options useable to ret forex traders. The nigh usual is the traditional birdcall /put, which plant lots ilk the various neckcloth pick. The former alternate is 1 defrayal choice trading or Smear which gives traders more tractability. (Hear to take the veracious Forex explanation in our Forex Walkthrough .)

Traditional options reserve the purchaser the veracious (but not the duty) to leverage something from the alternative vendor at a set damage and clip. E.g. a monger mightiness leverage an pick to buy two loads of EUR/USD at 1.3000 in one month, such a abridge is known as a EUR cry/USD put. (Hold in intellect that, in the options commercialise, when you buy a cry, you buy a put simultaneously equitable as in the cash commercialize .) If the toll of EUR/USD is downstairs 1.3000, the pick expires slimy, and the emptor loses lone the bounty. On the over-the-counter give, if EUR/USD skyrockets to 1.4000, so the emptor can employment the selection and increase two heaps for sole 1.3000, which can so be sold for lucre.

Since forex options are traded nonprescription (OTC), traders can select the cost and appointment on which the alternative is to be valid so incur a citation stating the premium they must pay to obtain the option.

There are two types of traditional options offered by brokers:

• American-style – This type of option can be exercised at any point up until expiration.
• European-style – This type of option can be exercised only at the time of expiration.

One advantage of traditional options is that they have lower premiums than SPOT options. Also, because (American) traditional options can be bought and sold before expiration, they allow more flexibility. On the other hand, traditional options are more difficult to set and execute than SPOT options. (For a detailed introduction to options, see Options Basics Tutorial .)

Single Payment Options Trading (SPOT)

Here is how SPOT options work: the trader inputs a scenario (e.g. EUR/USD will break 1.3000 in 12 days), obtains a premium (option cost) quote, then receives a payout if the scenario takes place. Essentially, SPOT automatically converts your option to cash when your option trade is successful, giving you a payout.

Many traders enjoy the additional choices (listed below) that SPOT options give traders. Also, SPOT options are easy to trade: its a matter of entering the scenario and letting it sap. If you are correct, you receive cash into your account. If you are not correct, your loss is your premium. Another advantage is that SPOT options offer a choice of many different scenarios, allowing the trader to choose exactly what he or she thinks is going to happen.

A disadvantage of SPOT options, however, is higher premiums. On average, SPOT option premiums cost more standard options.

Why Trade Options?

There are several reasons why options generally appeal to many traders:

• Your downside risk is limited to the option premium (the amount you paid to purchase the option).
• You have unlimited profit potential.
• You pay less money up front than for a SPOT (cash) forex position.
• You nark set the price and expiration date. (These are not predefined like those of options on futures .)
• Options can be used to hedge against open spot (cash) positions in order to limit risk.
• Without risking much of capital, you can use options to trade on predictions of market movements before fundamental events occur (such as economic reports or meetings).
• SPOT options allow you many choices:

• Standard options.
• One-touch SPOT – You receive a payout if the price touches a certain level.
• No-touch SPOT – You receive a payout if the price doesnt touch a certain level.
• Digital SPOT – You receive a payout if the price is above or below a certain level.
• Double one-touch SPOT – You receive a payout if the price touches one of two set levels.
• Double no-touch SPOT – You receive a payout if the price doesnt touch any of the two set levels.

So, why isnt everyone using options? Well, there also are a few downsides to using them:

• The premium varies, according to the strike price and date of the option, so the risk/reward ratio varies.
• SPOT options cannot be traded: once you buy one, you cant change your mind then sell it.
• It can be hard to predict the exact period and price at which movements in the market may occur.
• You may be going against the odds. (See the article Do Option Sellers Have A Trading Edge. )

Options Prices

Options have several factors that collectively determine their value:

• Intrinsic value This is how much the option would be worth if it were to be exercised right now. The position of the current price in relation to the strike price can be described in one of three ways:

• In the money This means the strike price is higher than the current market price.
• Out of the money – This means the strike price is lower than the current market price.
• At the money – This means the strike price is at the current market price.