Currency option trading has comparable basic function to other types of option trading. When you purchase currency options, also known as Forex options, you’ll be granted the right to buy or sell the currency that is the primary security for a particular period of time at a predetermined price or strike.
People who trade currency options have the main objective of making money or make use of it as a hedging strategy, typically to safeguard a cash position in the foreign exchange market. Currently, the two types of forex options are the traditional and SPOT or single payment options trading. These two are being traded in somewhat distinct manners. For a novice trader like you, it’s highly recommended to learn about futures trading systems to become familiar with the option trading process proficiently.
Options Trading Basics
Gaining knowledge of the steps on how to trade currency options requires distinguishing the differences between currency options and other forms of options. Remember that forex trades in pairs, thus one currency is always matched against another. When a particular currency increases in value against the other, the second necessarily plunges in value compared to the first. Therefore, a currency option is at all times in a “call” and a “put” position. For instance, if you purchase an option for the Euro and U.S. dollar with the preference to purchase the Euros at an exchange rate of $1.4000 each, it would be listed as “call” for Euro / “put” for USD.
Trading currency options calls for opening an online forex trading account through an authorized currency dealer. But before closing a deal, ensure first that the dealer you transact with permits currency options, since not all dealers do. Note that forex is a self-governing securities market. The Securities and Exchange Commission (SEC) recommends that you select a broker who is authorized by the National Futures Association (NFA).
Currency futures trading is virtually done online through software “trading platforms.” If you don’t have your own at the moment, many good dealers will furnish you with this trading tool.
Getting Started Trading Currency
Once you’ve opened a trading account, most currency trading tips will recommend that you go for a traditional forex option. You should check the existing exchange rate for the currency pair that you wish to trade. Distinct from other options, you may select the strike price that will reward you the right to exercise the option. You will also be allowed to choose the expiration date of your option contract. Complete this information together with the lots of currency. Decide whether you are going short or long on the base currency of the pair.
For instance, if you believe that the Euro will increase in value over the USD in the next 30 days and the present exchange rate is $1.3000 every Euro, you must go long on the Euro by placing EUR (call)/USD (put), which means $1.300 that will expire 30 days from now on.
Things to Remember
- Always ask your dealer to determine the cost of the option prior to essentially executing the transaction. You will receive a response giving you information about the dealer’s premium fee in pips. The pip stands for the smallest amount the currency pair will be permitted to exchange by.
- With a stock trading system, you will be compelled to read charts and analyze market movements. With options trading, you will have to monitor the exchange rate regularly. So when the market shifts in your favor the next month that your position is “in the money”, you may execute the option, making you profitable. However, if your calculation is wrong, you will mislay the money you compensated for the option.
- To benefit from the market trends in currency option trading, it’s best to purchase SPOT options. These single payment option trades function uniquely than other options. With the use of your trading program, you can go for a target strike price you feel a currency pair will attain in the following weeks and an expiration date. You will then reimburse a premium to your dealer to buy the SPOT option. When the currency rate arrives at your preferred strike price, the transaction will close out automatically and the proceeds will be added to your account balance. However, if you’re calculation is incorrect, the expiration date will come and go, giving you nothing.