Trading in forex options was not possible some years back. This is a relatively new trading style, when compared to the number of years it has been available on the stock market and on the commodities trading market. The concept of Forex options is new in the currency markets and was introduced in order to allow large banks and financial institutions to limit and control the amount of exposure that they had in the currencies market.
Since the numbers are extremely large when it comes to trading in the currency market, these large financial entities are able to use them to hedge trades. However, with technology, responsive trading platforms, easy and quick access to the internet, forex options is something that the retail trader can dapple in as well. In fact many people prefer to trade in forex options since it limits exposure. What are Forex Options? Forex options is basically a way to trade in currencies without really exposing the trader to the full blast of the dynamic forex market.
The forex trader defines the date and the price at which he will sell or buy a specific currency at a specific price. See more in this abaft review. The great thing is that the seller is not obligated to make that transaction if he does not want to. The amount that will have to be paid for the transaction is decided by the value of the assets that were meant to be traded. Forex Options Types There are typically two styles in which forex options are traded.
These are the traditional forex options and the single payment forex options. In traditional forex options, the trader places an order just like he would do in the case of stock options. One needs to decide the currency pair that one would be dealing in and also notify the pair. For example, a EUR/USD forex option can be notified as EUR put / USD call. While placing the option one also needs to specify the date and price of the trade. The date is called the expiration date.
There are also two different forms of traditional forex options. In the American style forex option, one can make the transaction any time before the expiration date. The European forex option does not allow for that and one needs to make the transaction only on the date of the expiration.
The single payment forex option is more like a forecast or a prediction that the trader makes. The trader needs to present a scenario to the broker with regards to a currency pair and the level that it will reach within a specific time frame. In case the prediction comes true, the payout is made on the day of the expiration.
If it proves to be false, then the premium calculated on the basis of the underlying asset is what the trader stands to lose. Despite the fact that exposure is low in forex options, once should understand that a volatile forex market can lead to a higher risk in call and put options.