Options trading currency

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.

Euro Currency Options.

Select flag to change PHLX U. S. Dollar settled currency.

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Currency Options.

Currency options allow investors to purchase option contracts on the value of foreign currency as it compares to the U. S. dollar. These contracts are U. S. dollar-settled, meaning no delivery or receipt of foreign currency occurs, and contracts are written in terms of U. S. dollars per unit of foreign currency (Philadelphia Stock Exchange, PHLX) or units of foreign currency per U. S. dollar (International Securities Exchange, ISE). Currency options are European style options and are cash-settled.

If you're trading call options on the PHLX, for example, your contract would be in-the-money if the foreign currency strengthened vs. the U. S. dollar over the life of your contract. Conversely, if you're trading put options, your contract would be in-the-money if the foreign currency weakened vs. the U. S. dollar during the life of your contract. The opposite would be true for currency options traded on the ISE because the contracts are quoted in the reverse format.

Currency Option Example - PHLX.

For example, let's say the value of the Currency X at the time of your contract is 1 Euro = 1.3500 U. S. dollars. Currency bid and ask prices are quoted as 100 times the conversion rate, so the price you would see if you got a quote for Currency X is $135. If you think Currency X is going to grow even stronger against the U. S. dollar, you could buy a call contract on Currency X on the PHLX on the $140 strike.

At expiration, Currency X is at $145, so your option contract is in-the-money. Currency option contracts are cash-settled, so your profit would be the settlement price minus the strike price, all multiplied by the common options contract multiplier of 100. Your net gain would be ($145 - $140) x 100 = $500. To determine your actual profit from the transaction, subtract the premium you paid to purchase the contract.

Contract: Call Currency X.

Strike Price: $140.

Price at Expiration: $145.

Profit: $500 - contract premium.

Again, remember that currency option contracts on the ISE are quoted in terms of units of foreign currency per U. S. dollar, so the strategy in this situation would be reversed. If you thought Currency X would strengthen against the U. S. dollar, you would purchase a put contract on Currency X on the ISE.

Currency Option Quotes & Symbols.

Options on a select number of foreign currency exchange rates are available through the Philadelphia Stock Exchange (PHLX) and International Securities Exchange (ISE) option exchanges. Settlement values are based on the 12:00 Noon (Eastern Time) spot price on the last trading day prior to expiration. The underlying symbols for each currency can be found in the tables below. While these underlying symbols themselves do not trade, they can be used to load an option chain to determine the available strike prices.

Note: A few ISE-traded currencies are quoted in U. S. dollars per unit of foreign currency.

Options involve risk and are not suitable for all investors. Detailed information on our policies and the risks associated with options can be found in the Scottrade Options Application and Agreement, Brokerage Account Agreement, and by downloading the Characteristics and Risks of Standardized Options and Supplements (PDF) from The Options Clearing Corporation, or by requesting a copy from your local branch office. Market volatility, volume, and system availability may impact account access and trade execution. Supporting documentation for any claims will be supplied upon request.

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Not a recommendation. Any specific securities, or types of securities, used as examples are for demonstration purposes only. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security or account.

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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.