Forex Options

A commonly used means of limiting risk in currency trading, as well as a means of leveraging trading capital, is to use Forex options. First of all a trader needs a Forex Account and then an options trading account. Thereafter, trading Forex options, proceeds much like routine Forex trading. The trader learns the fundamentals of the Forex pair that he or she will trade and assesses changing market sentiment as when trading Forex with candlesticks. As with regular Forex trading, the most profit lies in trading volatile currency pairs. The most accurate technical analysis comes with high trading volume. And, the most accurate fundamental analysis comes with transparency.

What are Forex Options for the Currency Speculator?

Currency speculators use Forex options to limit their risk. No matter how much a market surprise might take prices in the opposite direction that traders anticipate, Forex options traders never lose more than the price of the options contract. This assumes that the options contract is out of the money before the trader can bail out of his trade. If the trader pays attention to the market he can commonly exit a trade while the contract still has some value. Think of options and think of limiting risk in Forex trading. This assumes that the trader is buying options, of course. Options writers or sellers are paid for their service but run the risk of substantial losses if trades go badly. While options buyers never execute a trade unless it is profitable, options sellers are obligated to fulfill the contract agreement no matter how bad things get. What is Forex for the seller of options? It is usually more profitable in the long run than buying options but is the province of large investment houses with deep pockets because of the occasional risk of a huge loss.

Making a Profit without Ever Trading Currency

Options trading allows a Forex trader to make money without ever buying or selling a foreign currency. What that trader does is buy, or sell, an options contract. The trader carries out fundamental and technical analysis and believes that the price of his or her options contract will go up in the near future. When the underlying currency pair performs as anticipated the Forex options trader exits his or her position by making the opposite trade. The trader receives payment in the options account without ever buying or selling US dollars, Yen, British Pounds, or Euros.

Leverage in the World of Forex Options

When a trader purchases Euros for dollars or Yen for British pounds he or she invests a given amount of trading capital in the trade. When he or she purchases an options contract the trader invests a substantially smaller amount in the trade. However, when the currency pair performs as expected the trader gains the same amount is if he or she had purchased or sold short for the sum total of the value of the trade. Part of the work of the successful Forex options trader is to pick in expensive options contracts which further reduce the cost of the trade. When the trader chooses correctly he commonly gains a multiple of his trading capital instead of a small percentage from the change in Forex currency rates.