The rapid expansion of the trading volume in the currency market has led to a rapid expansion in currency options trading market as well. It functions in many ways like the equity options market with a few differences. If the option trader believes a currency price will move higher, he/she will buy calls on the currency. This gives them the right to buy the currency at a set price for a specific amount of time. If prices are trending lower, he/she will buy puts on the currency. This gives them the right to sell the currency at a set price before the option expires.
One difference between currency options and equity options is that currencies trade in pairs. The first currency listed in the pair is the base currency. The call or put is purchased on this currency. Traders may purchase a traditional option contract. They chose the strike price(exercise price) and the expiration date. This is another difference between currency options and equity options. After selecting these factors the broker calculates the premium they will charge for this right. If the trader accepts the premium, options are purchased. If for example the trader believes the euro will rise against the dollar, they will purchase calls on the EUR/USD. If they are right and before expiration the euro has moved up, the trader must exercise the option(purchase the currency) and then sell it in the market to realize the profit on the transaction. If the euro does not rise the option will expire worthless. The premium paid for the option is the amount lost on the transaction.
The SPOT contract is a bit different from the traditional option. It does not have to be exercised in order to realize the profit that has been generated. Just like the traditional contract the trader is the one who selects the strike price and the expiration date. The broker sets the premium based on these two factors. Premiums for SPOT contracts are higher than for traditional options. If you think a currency base price will move down you would purchase puts. If you are correct, the profit will automatically be credited to your account with the broker. If you are wrong, you will lose the premium at expiration.
There are several factors that will affect the premium level on an option contract. Obviously, the more time there is until expiration the higher the premium will be. The closer the strike price is to the market price the higher the premium will be. Volatility of the underlying currency price will also increase the premium.
The most popular reason for getting involved with the currency options trading market is speculation. Traders are purely trading for profits. The exposure to risk is limited to the amount of the premium that the trader pays to own the option. This factor makes it much more appealing.
Many people use currency options trading as a tool to hedge themselves from wide price swings when they own actual currencies. They may be in a business that hires foreign workers, or purchases raw materials from other countries. Hedging is used not to make money but to protect them from losing money on business transactions.
Selling options is another slightly more complex strategy for trading options. The traders exposure to risk is much higher so this is not a strategy employed by most. Large deposits are required by the broker to secure these trades.
Becoming active in the currency options trading market is growing in popularity. Risks are limited to the amount of the premium paid, but if trades work, the profits can be very large. - 23309
One difference between currency options and equity options is that currencies trade in pairs. The first currency listed in the pair is the base currency. The call or put is purchased on this currency. Traders may purchase a traditional option contract. They chose the strike price(exercise price) and the expiration date. This is another difference between currency options and equity options. After selecting these factors the broker calculates the premium they will charge for this right. If the trader accepts the premium, options are purchased. If for example the trader believes the euro will rise against the dollar, they will purchase calls on the EUR/USD. If they are right and before expiration the euro has moved up, the trader must exercise the option(purchase the currency) and then sell it in the market to realize the profit on the transaction. If the euro does not rise the option will expire worthless. The premium paid for the option is the amount lost on the transaction.
The SPOT contract is a bit different from the traditional option. It does not have to be exercised in order to realize the profit that has been generated. Just like the traditional contract the trader is the one who selects the strike price and the expiration date. The broker sets the premium based on these two factors. Premiums for SPOT contracts are higher than for traditional options. If you think a currency base price will move down you would purchase puts. If you are correct, the profit will automatically be credited to your account with the broker. If you are wrong, you will lose the premium at expiration.
There are several factors that will affect the premium level on an option contract. Obviously, the more time there is until expiration the higher the premium will be. The closer the strike price is to the market price the higher the premium will be. Volatility of the underlying currency price will also increase the premium.
The most popular reason for getting involved with the currency options trading market is speculation. Traders are purely trading for profits. The exposure to risk is limited to the amount of the premium that the trader pays to own the option. This factor makes it much more appealing.
Many people use currency options trading as a tool to hedge themselves from wide price swings when they own actual currencies. They may be in a business that hires foreign workers, or purchases raw materials from other countries. Hedging is used not to make money but to protect them from losing money on business transactions.
Selling options is another slightly more complex strategy for trading options. The traders exposure to risk is much higher so this is not a strategy employed by most. Large deposits are required by the broker to secure these trades.
Becoming active in the currency options trading market is growing in popularity. Risks are limited to the amount of the premium paid, but if trades work, the profits can be very large. - 23309
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To REALLY make a big splash in currency options trading you MUST get a good currency trading education!
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