As a trader in the Forex market it is important to understand the basics governing Forex options. This is one way to add flexibility to your trading and as the name suggest it gives you options regarding the trade of currency.
Forex options are ideal investment tools that allow the trader to profit from the currency price movements while limiting the risk of the trade. An added advantage with Forex options is that traders are able to make money regardless of the direction of a currency pair’s movements. Whether the currency pair is moving higher, lower or even sideways the trader is able to make money.
There are basically two types of options available to Forex traders. They are standard options and exotic options. The standard options are also known as vanilla options as they are plain and simple and lack extra frills. The exotic options on the other hand have added frills and are used in specific situations.
Understanding the basics of Forex options can be done by studying the standard options or vanilla options. There are two types of vanilla options known as call options and out options. Both these options give the trader the right to buy or sell a currency pair without being under obligation to do so. A call option allows the trader to buy a currency pair at a certain price on or before a set date. In the same manner a put option allows the trader to sell a currency pair at a set price before a set date.
We can understand how to use Forex options better if we look at a few examples. If a currency pair is going to ascend to a higher level in your estimation then you can take advantage of the movement by buying a call option or by selling a put option. Likewise, if your estimate is that the currency pair is going to move down then you can sell a call option or buy a put option.
Currency movement Call option Put option
Rising currency level buy sell
Declining currency level sell buy
As a trading tool options are invaluable to Forex traders. Every vanilla option has a strike price, expiry date and a premium attached to it. The strike price refers to the price at which you are able to buy or sell the currency pair. The expiry date refers to the preset date at which the option expires. The option becomes worthless if it is not exercised by that date. The premium is the price you pay or receive when you settle the option. Forex options can be used as multi-faceted trading tools that allow the trader great flexibility and better chances of profits.