How to Trade with Forex Options

Forex options are a form of trading in which the trader defines how much risk he is willing to take. Here the owner of the forex options has the right but not the obligation to convert a certain amount of one currency into another currency at a pre defined exchange rate on a specified date. The inherent value of the deal is derived from the value of the underlying assets. This form of trading has always been an integral part of the stock markets and has been introduced only recently in the forex world. It is a very effective method for limiting risks and increasing profits.

Understanding Forex Options

Let’s take a real world example. Suppose a trader has an option of buying a property for $15,000 by September 21. What the trader can now do is wait till the defined date and see how the property market behaves. If the rates rise, he can buy the property for the agreed upon price and make a profit or if the rates fall, he can leave the deal and avoid loss.

Types of Trade Forex Options

There are two primary types of forex options available for any trader:

• Traditional Forex Options: This call/put options work very much like stock options. The currency pairs are notified here by their movements, for example, for the EUR/USD pair it will be EUR call/USD put. Both the call and put transactions are carried out over the counter, at the same time. This allows the trader to choose the date and the price of their preferred trade forex options, by paying a small premium to the broker. There are two types of traditional options:
  
  
  
  • American Style Option: This option can be exercised any time before expiration.
  
  
  • European Style Option: This option can be exercised only on the date of expiration.
  
  
  
  


• Single Payment Options Trading: This form of trade forex option is exercised by first giving a scenario to the broker, like “EUR/USD will break 1.4200 in 10 days.” Payout is made if the scenario occurs. The only downside is that if the scenario does not occur, the trader stands to lose the premium he paid for the option.