Options trading forex

Forex Option & Currency Trading Options.

DEFINITION of 'Forex Option & Currency Trading Options'

A security that allows currency traders to realize gains without having to purchase the underlying currency pair. By incorporating leverage, forex options magnify returns and provide a set downside risk. Alternatively, currency trading options can be held alongside the underlying forex pair to lock in profits or minimize risk. In this case, limiting the upside potential is usually necessary for capping the downside as well.

BREAKING DOWN 'Forex Option & Currency Trading Options'

Not all retail forex brokers provide the opportunity for option trading. Retail forex traders should research prospective brokers because for traders who intend to trade forex options online, having a broker that allows you to trade options alongside traditional positions is valuable; however, traders can also open a separate account and buy options through a different broker.

Forex Options Trading Brokers.

A forex exchange option (also called FX option or currency option) is a derivative financial instrument that gives its owner the right to exchange money from one currency to another at a pre-set exchange rate on a particular date (the option owner is not obliged to take advantage of this right).

Let's see how this look in a practical example: a GBP/USD contract for example gives its owner the right to sell £100,000 and buy $200,000 on May 1. The pre-set exchange rate here is 2.000 and the notional amounts that could be exchanged are £100,000 and $200,000.

If the actual exchange rate on May 1 is 1.900 for example, the FX option is exercised letting its owner sell GBP at 2.000 and buy GBP immediately on the spot market, making a profit in the process.

This is why there are a few things you need to look for when shopping for a forex options trading broker:

- Competitive commission rate for your forex transactions.

- Reliable online trading platform to execute your forex options trading.

- Real-time rates, charting and research tools to help you make the right investment decisions.

Below is a list of OTC Forex Options Brokers. If you are looking for exchange traded forex options, check Interactive Brokers, Charles Schwab or Thinkorwim.

Forex Options Trading Brokers.

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PFSOFT adds options trading modul to Protrader platform.

PFSOFT, a broker neutral software developer based in Ukraine, today announced the addition of a options trading functionality to Protrader, its multi-asset trading platform. The new modul, allowing users to trade options along with forex, stocks and futures, is named Option Master. Read more.

PFSOFT adds options trading modul to Protrader platform.

PFSOFT, a broker neutral software developer based in Ukraine, today announced the addition of a options trading functionality to Protrader, its multi-asset trading platform. The new modul, allowing users to trade options along with forex, stocks and futures, is named Option Master. Read more.

Moscow Exchange Introduces New Volatility Index.

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Saxo Bank Continues Yuan Push, Launches USD/CNH Options.

Danish bank and Forex broker Saxo Bank does not know how to stop when it comes to introducing new trading products and once it started that push into trading with the Chinese Yuan, it has not stepped on the brakes. Read more.

Forex Industry News.

Latest forex brokers.

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Forex Options Basics.

Understanding Options.

Options are usually associated with the stock market, but the foreign exchange market also uses these derivatives in trading. It gives traders the opportunity to make money at a risk he has set for himself. To understand this concept better, let us use the example of purchasing a car.

If you hold a contract that requires you can buy a certain car on May 1st at a price of $1,500, you have an option to buy the car. This option ensures that if the value of the car increases at the predetermined time of purchase (in this case on May 1st), then you will profit from it because you can sell the car to another person for more than the amount you originally paid for.

On the other hand, if the value of the car decreases from the original amount, it wouldn’t be beneficial to buy that car. The option gives you the right to buy, in this case, the car but not the responsibility to pay for it if you don’t want to. This significantly lessens the risks to the trader. There are basically two types of options available to retail traders. These include the traditional call/put option and the single payment option trading (SPOT) trading.

Types of Forex Options.

Traditional Option.

The traditional call/put option works very much like the stock option. It gives the buyer the right (but not the obligation) to buy from the option seller at a specified time and price. For example, a trader can purchase the option to buy four lots of EUR/USD at 1.4000 for a certain month (this contract is called a EUR call/USD put). Remember that in the options market, you buy a call and a put at the same time. If the price of the EUR/USD goes below 1.4000, then the buyer loses the premium. But if the EUR/USD increases to 1.6000, then the buyer can use the option and gain the four lots for the agreed upon amount and sell it at a profit.

The Forex option are traded over-the counter. Because of this, Forex traders can easily choose the price and date of their preferred option. They will receive a quote regarding the premium they need to pay in order to get the option. There are two kinds of traditional options available today:

Can be used at any point until the expiration date.

Can only be used at the point of expiration.

Probably the main advantage of traditional call/put option over its counterpart is the fact that it requires lower premium. In addition, because the American-style option allows it to be traded even before expiration, forex traders gain more flexibility. On the downside, traditional options are requires more work to set and execute compared to SPOT options.

Single Payment Options Trading (SPOT)

SPOT options have almost the same concept as traditional options. The main difference is that the forex trader will first give a scenario (UER/USD will break 1.4000 in 2 weeks), gets a premium, and then receive cash if his scenario occurs. SPOT trading converts the option to cash automatically if your trade is successful. This type of option is very easy to trade because it only requires you to enter a scenario and then wait for the results.

Essentially, if your scenario plays out, you receive cash. But if it is incorrect, you will shoulder the loss of the premium. Another advantage of the SPOT option is it allows a wide variety of choices for the trader. He can choose the exact scenario that he thinks will play out. The main downside of the SPOT premium is that it is higher. In general, it costs significantly more than its counterpart.

Benefits and Downsides of SPOT Options.

There are a lot of reasons why SPOT options appeal to a lot of investors and forex traders. Among its many benefits include:

Financial risks is limited to the premium (the payment to buy the option) Infinite profit potential The trader sets the price and the date Requires less money up-front compared to the spot Forex position The option can hedge against cash positions and limit risks Options give the opportunity to trade on predictions about future market movements without the risk of losing a lot of capital SPOT options provide a lot of choices including standard options, one-touch SPOT, No-touch SPOT, Digital SPOT, Double one-touch SPOT, and Double no-touch SPOT.

But if options have all these benefits, why isn’t everyone into this type of forex trading? It is important to recognize that it does have its downsides as well.

Premium varies depending on the date of the option and strike price. Because of this, the risk/reward ratio fluctuates as well SPOT options are not allowed to be traded . Once you buy it, you can’t sell it It is difficult to predict when and at what price the market will move.

What Determines the Option Price?

As was mentioned earlier, the premium price can vary because of several factors. This is why the risk/reward ratio of forex options trading varies. Some of the factors that determine the price are:

This is the current price of the option if it was used. The position of this price against the strike price can be described in three ways such as “in the money” (when the strike price is higher than the current value), “out of money” (the strike price is lower than the current value), and “at the money” (the strike price and the current value are at the same level).

This reflects the uncertainty of market movements over time. In general, the longer the time period of the option, the higher the price you have to pay.

Interest Rate Differential.

A change in the interest rates has an impact on the relationship between the strike price and the current market value. This differential is often included in the premium as part of the time value.

High volatility increases the probability that the market price will hit the strike price in a certain timeframe. Volatility is often included as part of the time value. Usually, volatile currencies require higher premiums.

4x Options Conclusion.

Options offer another opportunity for traders to make a profit with lower risks involved. Forex options, in particular, are prevalent during periods of political uncertainty, important economic developments, and significant volatility. It is up to the trader whether he will take advantage of the opportunity presented by forex options or not.

Would you like to be contacted to receive more information about opening a trading account?

Choose the brokers you would like more information on. We recommend starting with at least 2.

OFXT is here to help you in your path to becoming a forex trader or broker. Our goal is to help you learn, practice, and master the art of currency trading. It's important to understand currency pairs such as the EUR/USD, USD/CAD, GBP/USD, USD/JPY, or other major currencies, and how the economies of each country impact one another. There is a high amount of risk involved in FX trading, for more information, please see our risk disclosure policy. Choosing a forex brokerage, signal provider, or charting software are difficult decisions, so we've established a set of reviews based on a variety of criteria for evaluating their credibility. Foreign currency trading is different from futures, options, or stock trading, and it's important to understand the terminology. We hope you will continue to learn to trade with us, and if you ever have questions, please drop us a line.

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Is it possible to trade forex options?

Yes. Options are available for trading in almost every type of investment that trades in a market. Most investors are familiar with stock or equity options, however options are available to the retail forex currency trader as well.

Currency Option Trading.

There are two types of options primarily available to retail forex traders for currency option trading. The first is the traditional call or put option.

The call gives the buyer the right to purchase a currency pair at a given exchange rate at some time in the future. The put option gives the buyer the right to sell a currency pair at a given exchange rate at some time in the future. Both the put and call options give investors a right to buy or sell, but there is no obligation. If the current exchange rate puts the options out of the money, then the options will expire worthless.

Alternatively, the other type of option available to retail forex traders for currency option trading is the single payment options trading (SPOT) option. SPOT options have a higher premium cost compared to traditional options, but they are easier to set and execute. A currency trader buys a SPOT option by inputing a desired scenario (ex. "I think EUR/USD will have an exchange rate above 1.5205 15 days from now"), and a premium will be quoted. If the buyer purchases this option, then the SPOT will automatically pay out should the scenario occur. Essentially, the option is automatically converted to cash.

Options are used by forex currency traders to make a profit or protect against a loss. It is also important to note that there is a wide variety of exotic options that can be used by professional forex traders, but most of these contracts are thinly traded because they are only offered over the counter. Because options contracts implement leverage, traders are able to profit from much smaller moves when using an options contract than in a traditional retail forex trade. When combining traditional positions with a forex option, hedging strategies can be used to minimize the risk of loss. Options strategies such as straddles, strangles and spreads are popular methods for limiting the potential of loss in a currency trade. (To learn more on this topic, see Exotic Options: A Getaway From Ordinary Trading .)

Not all retail forex brokers provide the opportunity for option trading within your accounts. Retail forex traders should be sure to research the broker they intend on using to determine whether everything that will be required is available. For forex traders who intend to trade forex options online, for either profit or risk management, having a broker that allows you to trade options alongside traditional positions is valuable. Alternatively, traders can open a separate account and buy options through a different broker.

Because of the risk of loss when writing options, most retail forex brokers do not allow traders to sell options contracts without high levels of capital for protection.