Minimize Your Risk Using Currency Options Trading!
The currency options trading market has experienced that same rapid growth the has been experienced by the FOREX itself. Options are just another way to take advantage of currency price movements. Currency options are similar in many ways to equity options. Calls are purchased on the currency when the underlying price is expected to rise. This gives the trader the right to buy the currency before the option expires, at a set price. Puts are purchased when the underlying currency price is expected to drop. The put gives the trader the right to sell the currency for a specific amount of time at a set price.
Trading currency options is a little bit more complex than trading equity options. Currencies trade in pairs so currency options do too. One type of contract is the traditional option contract. In the scenario the trader selects the strike(exercise) price. They also select the date of expiration. The broker uses these two factors to determine the option premium. If it is acceptible to the trader the contract/contracts are purchased. If it appears that the Japanese yen will rise against the dollar soon, the trader would purchase puts on the USD/JPY. If the trade works, the trader will buy the dollar in the market and sell(put) it at the strike price realizing a profit. If the yen does not rise against the dollar, the option will expire. The trader will realize a loss of the premium paid.
The second type of option on a currency is the SPOT contract. This contract does not have to be exercised to realize a profit from changes in currency prices. Just as in the traditional option the trader selects the strike price and expiration date. The premium is set based on these two factors. It should be noted that premiums on SPOT contracts are usually higher than on traditional contracts. If you feel a currency will move higher against it’s pair you obviously will buy calls. If you are correct the profit from the trade is simply deposited into your trading account. Of course if you are wrong the options expire and you lose the premium.
Option premiums are set by the broker. The closer the current market price is to the strike price the higher the premium will be. The premium will be higher the more time there is until expiration. A high level of volatility in the currency price can also cause the premium to increase.
There are a number of reasons people get involved in the currency options trading market. Speculation is the top reason. Pure profit is the motivation. In this high volume market, with it’s limitation of risk exposure traders find it easier to take advantage of price changes in the currency market.
Another reason people become involved with currency options trading is they want to hedge currencies they currently own from wide price swings. They may have business partners in other countries so they need to pay for goods and services in another currency. They use options to help protect them from losses rather than to make a profit on them.
So far we have discussed the strategy of buying calls or buying puts on a currency depending on how you believe the price will move. Some traders actually sell options. The risk in selling options short is much higher than just buying options. Most brokers will require that a trader deposit a large amount of capital to secure such a position.
Currency options trading is an exciting field of endeavor. You can participate in the highly popular FOREX market while limiting your risk to losses. If you trade correctly your profits will be multiplied.
To REALLY make a big splash in currency options trading you MUST read a good currency trading tutorial!
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