Forex Option Trading to Diversify Your Forex Trading
Forex option trading is a financial instrument, which serves for both, hedging and speculating. In the past, only the large financial institutions used to use Forex option trading for hedging. However, nowadays this type of trading is also available for individual Forex traders. Just like any other type of trading, option trading has advantages and disadvantages. For example, this financial tool is very liquid and at the same time naturally very risky. Forex option buyers are called holders, and option sellers are called granters.
Forex options grant the owner the right (not obligation) to exchange a particular amount of one currency into another currency on a particular date and at a pre-agreed rate. Forex option trading is known for incurring only a limited liability. The buyer only has one obligation - to pay a premium to the seller prior to the purchasing of the foreign currency option. The seller can either buy the contract back before it expires, or to hold the contract until its expiration.
When you buy a Forex option, you are opting for a fixed price of the transaction. Forex options have a fixed amount with a fixed expiration date, rather than being tied to the markets' fluctuations.
Do Forex options always get exercised? As a matter of fact, most of the time the options are not exercised by their purchaser with the Forex option trading; options are often offset until they expire. If the option gets exercised, a spot position is assigned to the option holder. There also is a threat of an option expiring worthless, if at the expiration time the strike price is lower than the purchase price.
One of the benefits of Forex option trading is that option has a fixed price. This means that you will not lose all of your capital in case the market goes against you. You will only lose the fixed price of the option. If the final strike price is higher than your purchase amount - you win. If it's lower - you lose, and your position becomes worthless. However, you only lose a fixed amount, and no more than that.
Forex option trading has evolved as a hedging tool, and due to that it can only be used at the international currency markets. This type of trading usually holds more risks as well as more profits.
Call options grant their owners the right to buy the currency. Put options grant their owners the right to sell the currency. Both call and put Forex option prices are predominantly influenced by volatility. Increasing volatility results in both call and put options to grow in price. There are two types of put and call option contracts in Forex option trading. Common (plain) options are called "plain vanilla" options and customized ones are called "exotic" options.
How to make your Forex option trading safer?
1. Only place a small portion of your account into option trading.
2. Do not try to trade at all times. It is better to patiently wait for the proven signals.
3. Trade on a Forex option trading demo account prior starting to trade live.
Forex option trading is an additional Forex trading strategy. In order to become better diversified, you may wish to learn more about Forex option trading in addition to regular Forex trading.
Forex options grant the owner the right (not obligation) to exchange a particular amount of one currency into another currency on a particular date and at a pre-agreed rate. Forex option trading is known for incurring only a limited liability. The buyer only has one obligation - to pay a premium to the seller prior to the purchasing of the foreign currency option. The seller can either buy the contract back before it expires, or to hold the contract until its expiration.
When you buy a Forex option, you are opting for a fixed price of the transaction. Forex options have a fixed amount with a fixed expiration date, rather than being tied to the markets' fluctuations.
Do Forex options always get exercised? As a matter of fact, most of the time the options are not exercised by their purchaser with the Forex option trading; options are often offset until they expire. If the option gets exercised, a spot position is assigned to the option holder. There also is a threat of an option expiring worthless, if at the expiration time the strike price is lower than the purchase price.
One of the benefits of Forex option trading is that option has a fixed price. This means that you will not lose all of your capital in case the market goes against you. You will only lose the fixed price of the option. If the final strike price is higher than your purchase amount - you win. If it's lower - you lose, and your position becomes worthless. However, you only lose a fixed amount, and no more than that.
Forex option trading has evolved as a hedging tool, and due to that it can only be used at the international currency markets. This type of trading usually holds more risks as well as more profits.
Call options grant their owners the right to buy the currency. Put options grant their owners the right to sell the currency. Both call and put Forex option prices are predominantly influenced by volatility. Increasing volatility results in both call and put options to grow in price. There are two types of put and call option contracts in Forex option trading. Common (plain) options are called "plain vanilla" options and customized ones are called "exotic" options.
How to make your Forex option trading safer?
1. Only place a small portion of your account into option trading.
2. Do not try to trade at all times. It is better to patiently wait for the proven signals.
3. Trade on a Forex option trading demo account prior starting to trade live.
Forex option trading is an additional Forex trading strategy. In order to become better diversified, you may wish to learn more about Forex option trading in addition to regular Forex trading.
About the Author:
Author Steve Maenshel can you develop a solid foundation for forex option trading. For more forex trading information, visit his forex resource center.