Forex Options Trading: Getting Started

Forex options trading involves a contract in which you as the buyer, pays a premium, to acquire the right, but not the obligation, to buy or sell Forex at a given price (the execution price), at a future date (expiration date) or before that date. The premium is the price of the option paid by the buyer to the seller.

FOREX options have a low transaction cost and offer good prospects for coverage and speculation, as well as having a high liquidity level.

Another important feature of options is that they are negotiable instruments in the market, and it is not necessary to accept the assets physically.

There are two types of options: calls and puts

Call options: these give you the right to buy a particular asset, in this case FOREX assets. You can buy a call (buy the rights) and you can sell a call (sell the rights).

When you buy a call option you are buying the right, but not the obligation, to buy the option at the execution price, on the expiration date or prior to that date, in exchange for a premium that you would pay to the seller of that call option.

Put options: these give you the right to sell your Forex option. You can buy or sell a put option. When you sell a put option, the buyer of the put gains the right, but not the obligation to buy the option, at the execution price, on the execution date, or prior to that expiration date.

In exchange for the put, the buyer (investor) pays you (the seller) a premium.

The holder of the option retains the right to buy or sell that option. The writer is the seller of the option.

Forex Option Styles

There are a number of different styles of options:

• American-style option: In American-style options you can exercise your rights at anytime up to the expiration date.
• European-style option: In the European style options, which are very common in FOREX trading, you can only exercise your rights on the expiration date and not sooner.
• Asian-style option: In these the payoff is set by the average underlying price over a pre-set period of time

Forex Options Trading Sources

There are a number of sources through which you could trade Forex options. These options are traded through both the over-the-counter (OTC) market and the stock market. These sources include:

• Futures commodity merchants (FCM) offer options on currency futures available on the Chicago Mercantile Exchange (CME).
• Over-the-counter (OTC) are also offered through a number of FCMs.
• Binary options are available through online firms.
• Trading options on currency pairs can also be through equity firms.