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.
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 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.
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.
Traders can sell options as well. They receive the premium. If the option expires rather than being exercised the person makes a small amount of money. Due to the higher risk exposure, the broke will require a much higher capital deposit on these types pf transactions.
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.
To REALLY make a big splash in currency options trading you MUST get a good currency trading education!
currency option trading is more stable than foreign currency trading and is often used by corporations as a way to hedge against the effects of fluctuating exchange rates.Options Trading
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