The lucrative venture of trading FX options, also known as Forex options or Foreign Currency Options, continues to attract more and more people who are trying it out and becoming successful at it. However, they all start as beginners that need to hone their skills in the art of investing in FX options to be successful. Read on to find out what a good FX options investor needs to know.
FX Options Types
Engaging in FX options trading involves two option types. The two types are the put or traditional call option. The call type is the purchase of an agreement that gives the buyer the right to buy a currency pair at a certain rate of exchange at a particular time in the future. The other FX Option type is known as a put option. This FX option type gives the buyer the right to sell a currency pair at a particular exchange rate in the future. In both instances there is no obligation to exercise the right to buy(call) or sell(put). The value of an FX Option goes to zero when it has reached the point that it is out of the money.
Online FX Options Trading
A point to note is that not every foreign currency options broker will offer you an opportunity to trade options in your accounts. You should take time to do your research to find the best broker available. If you want to trade online you should get a broker that will let you trade your FX options together with traditional options. Ensure that your FX options broker has the ability to provide accurate FX option pricing. The availability of FX options quotes are not provided by all brokers, so make sure to do your due diligence. Keep in mind that due to the risks associated with loss when writing FX options, a retail FX options broker may not let traders get involved in options contracts with limited capital to serve as protection.
Reasons for Trading Options
One of the reasons you should go into fx options broker is that the downside risk of the trader is limited to their option premium. This kind of trading has potential to make profits and you can set your price and its expiry date. Without risking much capital, it is also possible to use your options for trading on predictions on the movements of the market prior to fundamental events such as meetings and economic reports.
FX Option Pricing
Some of the factors affecting FX option pricing include:
- Intrinsic Value
That is the value of the trading option in that case that you wanted to trade it immediately. The relationship between the current price's position and that of your strike price can be described as “in the money”, where the latter is higher than the former. “Out of the money” describes a situation where your strike price cost is lower than the current price in the market while “at the money” means that they cost the same.
- Time Value
This is a representation of the uncertainty of the market price over a period of time. Generally, you will pay a higher premium if the period of time is long.
- Interest Rate Differential
When interest rates change, they affect how the strike of your option and the current rate in the market relate. The effect will be factored into your premium as a time value function.
Volatility is another FX option pricer whereby higher volatility will increase the chances of the prevailing market price to hit the current strike price. This is within a certain time period. Volatility goes into the current time value and normally the most volatile currencies attract premiums with higher options.
Strategies in Forex Option Trading
You can use options to capture profit and also for hedging against your positions.
Strategies for Capturing Profit
Most traders will utilize their FX option pricing calculator to determine whether to invest in FX options when there are important events or reports and when the risk and spreads go up in the forex markets. Some profit-driven traders use FX options in place of cash because they are cheaper. You stand to make more money from an option’s position as compared to cash position using a similar amount.
If you want to decrease risk you can hedge against existing positions by using FX options. In some cases, you can use your options with or instead of stop-loss points. One of the reasons you should use FX options with stops is they will avail unlimited potential profit for you if the prevailing price is against the position you have taken.
The purchase of FX options provides the buyer the opportunity to purchase or sell a set amount of foreign currency at a set price for a given time frame. FX Option trading offers an opportunity to diversify your portfolio as a tool to strategically hedge positions or to strictly attain profit. There are many online FX options brokers available, so choose wisely after much research.
It's always a good strategy to diversify your investment portfolio. If you're getting into stocks equities too, it's best to take the help where you can get it. Equities trading veteran John Thomas offers a service that coaches you on what stocks to buy at any moment and which ones to sell, and this gives you an edge when you're starting out. There is a bit of a learning curve, and you might lose some profit opportunities while you're getting your bearings.