Forex Options is a type of options trading for foreign exchange enthusiasts to make profits while keeping the risk factor down. Most people are not aware of forex options as there are a lot of constraints. It can be quite tricky but with right skills, you can excel in your trading career. Here are a few things you should know before getting into Forex Options.
WHAT IS FOREX OPTIONS?
Forex options come with a contract that enables a trader to buy/sell a specific currency pair for a fixed value irrespective of the market value. The contract is valid only for a fixed period of time.
TYPES OF FOREX OPTIONS WHICH YOU SHOULD KNOW ABOUT
1.TRADITIONAL CALL/PUT OPTIONS
The traditional type of forex options is similar to the stock options. It provides the buyer with the right to purchase an item from the seller at a specified price and time. Though the buyer purchases that particular item, he is not obliged to it. Also, the buyer needs to pay an amount when he buys an option which is called a premium.
In forex options, currency pairs are used. Hence, you need to keep in mind that whenever you buy a call, you buy a put simultaneously. When you buy a call option and if the price goes down when the option expires, it becomes worthless and you lose the premium alone or else you gain the currency pair bought/sold and you can buy/sell it for a profit. It’s vice versa when you buy a put option.
THE TRADITIONAL OPTIONS IS FURTHER DIVIDED INTO TWO CATEGORIES:
- American-style: You can use this type of option if you want to trade at any point until the time of expiration.
- European-style: You can use this type of option if you want to trade only at the time of expiration.
The advantages of traditional options are that they have lower premiums and that they are more flexible when compared to SPOT options as you can trade at any time before expiration time also(in case of American-style). But these options are difficult to set and execute, unlike SPOT options.
2.SINGLE PAYMENT OPTIONS TRADING (SPOT)
The SPOT options work in a quite different way from that of the traditional method. Here, you will have to enter a scenario: for example, the price of a particular currency pair will rise to a specific price in a specific time. If the scenario you entered becomes correct, then you will be receiving a payout amount or else you will be losing the premium. This type of options provides a wide variety of scenarios so that you can input any kind of scenario that you think of.
The advantage of SPOT options is that they are easier to trade but it has the main disadvantage of having higher premiums.
ADVANTAGES OF TRADING FOREX OPTIONS
In case the market does not move as you expected, your risk is always limited to the premium. Hence you are free to try different combinations of trades and expect it either way.
2.ABILITY TO SET PRICE AND EXPIRATION DATE
The price and expiration date can be set in this type of options unlike in futures options. They can be set as per your prediction about the market movement.
You can predict the movements in the market without risking a lot of capital. So, the capital which is being saved can be invested in buying more options where you predict and have chances to win.
4.ELEVATED PROFIT POTENTIAL
In options, the risk is limited to the premium amount only. Hence, the scope of making the profit is higher if you can manage to predict the market correctly.
5.HEDGING IS POSSIBLE
There is always a possibility to hedge your open position order for limiting your risk in case the market turn away from, as you predicted.
Although forex options come with a number of advantages, it is crucial to keep yourself updated to avoid mishaps. It takes dedication and endless hours of learning to have a successful trading career.