When the term “option trading” comes in a discussion, the immediate reaction is to assume the stock market. This is no surprise; options have been a main staple of stock trading for many years. However, since the forex market became widely available by trading via online brokers, option trading in the forex market has become just as popular. The forex option market is the largest, deepest, and most liquid of any option trading market in the entire world. Also, in the hands of a skilled money manager, forex option trading creates more opportunities of limiting losses and increasing profits than in trading currency alone.
In the world of forex option trading, there are usually two routes to take; traditional options (call/put) and SPOT (single payment option trading). Traditional option trading affords the trader the right (but not obligation) to purchase currency at a set time and price. This type of option trading is more closely related to the stock market, and is something many investors can already identify with. For example, an investor may enter into an agreement (option) to buy a lot of GBP/USD in four months time at a rate of 1.9500. If in 4 months time the price is below 1.9500, the investor considers the option worthless and loses only the premium that was initially put up for the option. If the price shoots to 1.9700 in 4 months’ time, however, the investor would exercise his right to purchase one lot at 1.9500 and immediately sell the lot at market price for 1.9700, creating 200 pips profit instantly.
SPOT (single payment option trading) is generally known as the
more flexible method when option trading, and affords the
investor many different opportunities. SPOT options work in much
the same manner as traditional options do; a contract is entered
to buy a specific currency at a specific rate in a specific
timeframe. The single main difference is that in SPOT option
trading, your option is converted to cash in the event that your
option trade was successful. Also, many different scenarios are
available for SPOT option trading:
This affords the trader many opportunities to achieve exactly the scenario that is predicted. However, the SPOT type of option trading usually has a higher premium; the SPOT option will cost more on average than the traditional option would.
Though it seems that there is a great deal of advantages to forex option trading, there are a few downsides to them as well. The premium (price that the option costs the investor) varies according to the date of the option, the method, and the price in which your option can be exercised, so it is sometimes difficult to keep a specific risk to reward ratio. Also, in option trading, it may be difficult to point the exact time and price to be profitable due to the longer term that an option is held, and the unpredictability of the currency market. Trends may change from a once lucrative option, and could easily turn a once thought profitable trade into a loss. This isn’t the greatest news for those interested in SPOT option trading, as once you enter into an option, it cannot be sold or traded.
Option trading in the forex market, as well as option trading in any market, can be a very lucrative investment for those with accurate prediction systems. Large sums of money can be pulled out of the market almost instantly after an option is exercised, considering the market being traded is the most liquid market in the world. This is more than enough to make even the most experienced traders across a broad range of markets drool. These same salivating professionals will still tell you, however, that great care and planning must go into each option trade, as risk of losing a great deal of money is still very real. Any and all investment opportunities should be approached with careful planning; soild money management and prediction systems are the keys, and could very well open the door to a new and exciting investment opportunity in option stock trading.
This website is for informational purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or financial futures instrument or to participate in any particular trading strategy. The information presented on this website is for general information only. Although every attempt has been made to assure accuracy, we assume no responsibility for errors or omissions. Forex-, Stock- and Futures trading is speculative, involves a high degree of risk and is designed only for sophisticated investors who are able to bear the loss of more than their entire investment. Performance figures shown are from a live forward test and can be considered hypothetical. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there can be frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully account for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.
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