How to Trade FOREX Options
Trading FOREX options offers traders many opportunities to take advantage of currency fluctuations. The principles are similar to options used on stocks and bonds. Traders should remember to practice trading before entering any positions with real funds.
- Difficulty:
- Challenging
Instructions
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1
Trade traditional option relationships. Buy puts in currencies you expect to lose value, and buy calls in currencies you expect to rise. Understand that the rise in a currency is relative to another currency. Know that the FOREX call and put prices are based on the cash prices for each currency.
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2
Know the difference in FOREX options with American- and European-style qualities. American puts and calls may be exercised at any time until the expiration date. European style puts and calls are only exercisable at the expiration date. These differences result in varying value calculations.
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3
Know that FOREX options are traded in the over-the-counter market and not on a quoted exchange. This allows traders more freedom to negotiate expiration dates and strike prices. Know that strike price is the price at which the currency put or call becomes effective. The price of the trade above the value of the strike price is called the premium.
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4
Realize that most brokerage firms that trade stocks, bonds and options do not offer FOREX trading. Traders will most likely have to open a new account elsewhere. Research your choice of FOREX brokers carefully. Know the available capital, the fee structure and research comments carefully. Almost all FOREX trading is conducted online.
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5
Understand Single Payment Option Trading. SPOT trading only requires a customer to be correct about whether an option will reach a selected strike price. The option holder does not get a dollar-for-dollar gain for the amount the option exceeds the stock price. There is only a flat fee received upon success.
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Tips & Warnings
Research your choice of brokers carefully. FOREX is largely an unregulated market.
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References
Resources
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