Getting Started in Forex Options

When the idea of options comes into mind, most people remember the stock market. But, the market of foreign exchange also provides the chance to exchange these distinct derivatives. Options provide retail traders many chances to minimize risk and boost profit.

Types of Forex Options

Two main types of options are accessible to traders of retail FOREX. The traditional call/put option, which operates similar to the respective stock option, is the regularly used option. The other option is single payment option trading (SPOT) which offers more flexibility to traders.

In traditional options, the buyer is given the choice but not the requirement to buy something from the seller of the option at a fixed price and fixed time. For instance, an option to buy two lots of EUR/USD at 1.3000 per month; such an agreement is referred to as EUR call/USD put. (Remember that, when you purchase a call, you buy a put at the same time, just like in the cash market where a currency is bought and sold simultaneously.) If the price of the option falls below the fixed price, the option is terminated without any cost, with the purchaser losing only the premium. However, if the option jumps to 1.4000, then the trader can implement the option and get two lots for only 1.3000, which in turn can be sold to gain income.

Since options in FOREX are over-the-counter transactions, the valid price and date of the validity of the option will be decided by the trader after which they will get a quote indicating the premium cost to obtain the option.

Brokers offer two types of call/put options:

• The American-style option which can be executed any time until the option expires.

• The European-style option which can be implemented only during expiration.

Compared to SPOT options, the premiums of traditional options are lower. More flexibility is also provided because they can be purchased and sold before their due date. However, traditional options are harder to fix and implement than SPOT options.

Single Payment Options Trading (SPOT)

The SPOT option works this way: a scenario is fed by the trader, he receives a quote for the cost of the option, and then he will be paid if the scenario happens. In essence, your option is transformed to cash when your trade is successful, resulting to a payout.

The extra choices provided by SPOT options give enjoyment to traders. Likewise, they can be traded easily: you simply feed the scenario, and wait for the result. You receive a payout if your scenario is correct. On the other hand, you only lose the premium. Another benefit of the SPOT option is that they provide alternatives of many varied scenarios, giving the trader a choice of what he expects to happen.

But, one setback of SPOT options is the cost of their premiums. SPOT option premiums cost higher than regular options on the average.