Forex means foreign exchange and trading is all about making decisions and choices. Forex trading on the whole means that buying the foreign currency and earning profit. In terms of finance, forex options also abbreviated as FX option is a derived financial instrument which gives the holder the right to exchange money denominated from one currency to other currency at an agreed exchange rate. Forex options market is one of the deepest, major and most fluid markets for options of different kind. Forex trading market provides the prospect to trade with unique. These options provide retail traders many options to bound risk and maximize their profit. Here we discuss what options are, how they are used and which strategies you can use to profit.
Various purposes behind forex options trading are:
· Many traders use these options as their downside risk will be limited to the option premium which means the amount paid to buy an option
· One can get limitless profit potential
· One will pay less money up front when compared to a spot cash option
· One will get a chance to fix a price and fix the expiry date for a trade
· These options can be used to evade against open spot cash position so that they can limit risk
· One can use these options to predict the market movements before any fundamental event occurs. And this can be done without risking too much of capital
Types of forex options:
Basically these forex options can be divided in to two types and they are:
Traditional option: This traditional option consists of call/put option that works like a stock option. This gives the trader to buy currency from a vendor at a set price and time. This call and put options are used to buy and sell a trade in the market. As forex options will be traded over the counter (OTC), traders will have the option to choose the price and date on which the option is to be valid and after that they will receive a quote stating the premium which they have to pay to get the option. Main advantage of this traditional option is that they have low premium when compared to spot options and the can be bought and sold before expiration.
This traditional option is again divided into two:
· American style: This option is used to at any point until the trade expires
· European style: This option is used only at the time of expiration
Single payment option trading (SPOT): This spot option is more flexible as this will automatically convert your option to cash when the option trade is successful. This gives many additional benefits and these are very easy to trade. This spot also offers many scenarios to assist the trader in choosing the exact one which he thinks will suit him.
These forex options or forex options trading will be very helpful in trading a foreign currency and will give many profits when a trade is successful.
Kelly wagenheim is an experienced trader of stocks, currencies, commodities and many more. In the wake of rising popularity of forex options trading, he offers all kinds of updated market news, strategies and tips related to forex options through his website. Visit the site to expand your knowledge base.