Trading Forex Exchange Rates through Options
When most people think about options trading they immediately think about the stock market. However, if you want to trade forex exchange rates then you can do this through options. Options trading gives retail traders the opportunity to increase the profit they make and lower the risk they face when trading. It is important that you know about the different types of options available to you.
Traditional Forex Exchange Rates Options
The first type of forex option is the traditional option and this is also the most common. This trading option works in a similar way to the stock market option. The trader is able to buy the option to purchase currency from the seller. This will happen at a set time and price. As all of the forex options trading is done over the counter it is possible for the trader to set the time and price of the option. Once this has been done the trader will be provided a quote which tells them the premium they would have to pay for the option.
There are actually two different types of traditional options that a broker may offer. The first is the American style traditional option that can be exercised at any point until the date set forth by the trader. The other type is the European style traditional option which can only be exercised at the time and date set forth by the trader. It is important that you find out which option you are getting from your broker.
One of the advantages to using traditional options is that they have a lower premium than the spot options. The American style options also allow for increased flexibility in your trading.
Spot options also known as single payment options trading is the second way you can trade forex options. With this options type the trader will create a scenario for what a currency pair may do. This will be given to the broker and a quote for the option is provided to the trader. If the trader’s scenario comes true then the trader is paid. However, if the scenario does not come true then the trader is not paid and they lose their premium.
There are a number of choices that come with spot options which makes them appealing to certain traders. However, the possibility of losing the premium and making no money also puts a number of traders off. As you are able to choose between a number of different scenarios you do have a good chance of getting the option correct if you take the time to analyse the market.
Of course, there are disadvantages that come with spot options as well. You do pay a higher premium for the spot options that the traditional options. The amount of the premium will depend on the broker you are using.
If you decide to trade in forex options you need to know about the different strategies that you can use. The most common strategies are the profit motivated strategies and the hedging strategies. The strategy that you use will depend on what you want to achieve with the options.
Get a free Forex PDF PLUS:
- 14 Video Lessons
- Free One-on-One Training
- A 5000$ Training Account
- In-House Daily Analysis
- Get FULL ACCESS