Forex Options Trading
Forex is the short term for foreign exchange. It is an over-the-counter financial market that deals with currency exchange. It is considered as the largest and richest financial market in the world encompassing stocks and futures trading. It trades approximately four trillion US dollars every day which is way more than the 55 billion USD traded on Wall Street. That is the reason why a lot of traders opt for this market.
Trading options are not just for the stock market. There is also Forex options trading. This means that one can trade options even in the FOREX market. Options trading limits the risks involved in trading and at the same time ensures profit.
There are two types of FOREX options. One is the traditional call/put option which functions more like the stock option and the other is the SPOT or single payment option trading which offers great flexibility than the traditional one.
In the traditional options, the trader has the right to purchase an option from the option seller which has a specified time and price. For example, the trader purchased an option to buy four lots when EUR/USD is at 1.5000 in two months. That option is interpreted as EUR call/ USD put. If the price of the EUR/USD in two months is below 1.5000, the option expires and the trader loses his premium. On the other hand, if the price of EUR/USD in two months is above 1.5000 (e.g. 1.6000) the trader can use the option to buy four lots at 1.5000 only. The trader makes profit by selling the lots at 1.6000 which was just gained at a price of 1.5000.
Traditional option trading is easy. The trader needs to purchase an option with specified date and price and then pay the premium in order to get the option. The trader can actually decide on the price and date on which the option is valid.
There are two types of traditional options that brokers offer. These are the American style and the European style. The American style allows the trader to practice the option anytime before the expiration while the European style allows the trader to practice the option at the exact time of expiration.
The great thing with traditional option is that they have a lower premium that SPOT. The only problem with this option is that it is more difficult to set and execute than SPOT options.
In the SPOT, the trader needs to make a scenario (like EUR/USD will cost 1.4000 in 30 days), pay the required premium, and then receives a payout (cash) when the scenario takes place. If the scenario did not happen, the trader immediately loses his premium. What is good with SPOT is that it has a lot of scenarios that the trader can choose from and also, there is no need to sell the options or trade it since when the option happens, it is directly converted to cash.
The down side of SPOT is its high premiums which is more than the standard premiums. If you want to read more about Forex than visit qwforex.com for more free information.