Forex Long Straddle Options Strategy

Currency trading is often most profitable when foreign currency rates are most volatile. However, this is also the time when traders are exposed to the most risk. If the fundamentals change significantly a trader who expected to see one currency rise against another may well see it fall and vice versa. A recipe for avoiding this potential disaster and gaining a profit along the way is a Forex long straddle options strategy. This is a simple options strategy in Forex trading and only requires the purchase of both calls and puts on the same currency with the same expiration date. In buying Forex options the worst loss that one can incur is the price of the options contracts involved. In buying puts and calls in Forex options trading the trader is under no obligation to execute a trade. He will only execute a trade in a Forex long straddle options strategy, or any similar trading strategy, if doing so results in a profit.

What Constitutes a Forex Long Straddle Options Strategy?

A Forex long straddle options strategy has two parts, a call contract and a put contract. These are purchased for the same currency pair with the same expiration date. A call contract gives a trader the right to purchase one currency with the other at the contract price. A trader buys a call contract when he believes that the price of the currency in question will rise. He does this based on fundamental and technical analysis of the market. A put contract gives a trader the right to sell one currency for another at the contract price. He will do this based on his expectation that the price of the currency in question will fall. In the case of a Forex long straddle options strategy, a trader will execute the contract that will make him money and let the other expire worthless. By using Forex options the trader limits his risk in the market and stands to gain whichever direction the market moves.

Why Use a Forex Long Straddle Options Strategy?

If a trader thinks that a currency price will go up he will typically buy the currency. If he thinks that it might go up but might also go down he can buy a call contract. This limits his risk if the currency falls and saves him a place in line to buy if his analysis is correct and the price goes up. A similar argument applies for buying puts if he thinks that the price of a currency will fall. So, why would one buy both a put and a call? Traders do this in extremely volatile markets. There are times when the fundamentals are unclear and the markets are spooked. At these times the price curve of a currency may take on a saw tooth pattern. To the extent that the market is swinging back and forth without a clear direction in sight, a Forex long straddle options strategy gives a trader the chance of a profit in either market direction and limits his risk to the price of the options contracts. The only way he can lose in this situation is if foreign currency exchange rates suddenly stabilize. Even then his maximum risk is the price of the options contracts.