Options on the Falling Euro

Put options on the falling Euro – EUR – are the most active that they have been for nearly a decade. The Euro has fallen nearly 5 percent in the last year. With no end in sight to the European Union’s sovereign debt dilemma, Forex options traders have increasingly purchased puts on the EU currency. In purchasing puts in Forex trading the Euro traders purchase the right to sell Euros at the contract or strike price. This can be done in any currency pair containing the Euro. The trader picks a currency which he believes will remain stable or go up in value as the Euro falls. If the trader is correct in his assessment the Euro will continue to fall versus other currency. He then has two choices. He can execute the contract for options on the falling Euro. He sells Euros for US dollars- USD, British Pounds – GBP, Yen – YEN, Canadian dollars – CAD, Australian dollars – AUD, or Swiss francs – CHF, whichever major currency he chose to trade against the Euro. His second choice is to simply exit the options trade by executing the opposite trade on the same currency pair with the same expiration date. This later choice allows him to profit from trading options on the falling Euro without ever purchasing Euros or any other currency.

Trading options on the falling Euro has two advantages over simply buying or selling Euros or other foreign currency. Options in trading Forex exchange help traders limit investment risk and allow traders to leverage their investment capital as well. When a trader buys put or call options on the falling Euro, for example, his only risk is the price he pays for the options contract. If currency rates to not perform as expected the trader limits his losses. If a currency trader buys out of the money puts or calls on one currency with the other he can often enter a trade at a very low cost. He does not invest the price of the currency involved, only the premium for his options contract. Should the currency pair perform as expected traders can earn multiples of their Forex options investment.

As put options on the falling Euro outnumber calls interest rates on government bonds in both Greece and Italy are rising. These two nations are part of the PIIGS group, Portugal, Italy, Ireland, Greece, and Spain, whose national debt issues have plagued the Euro for well over a year. The underlying concern is that Greece and then Italy will default on their national debt and that the stronger members of the EU as well as the EU central bank will not intervene sufficiently to stop a wave of sovereign debt defaults reaching beyond the EU. Trading volatility is high as traders seek to profit from this unfolding drama. Buying options on the falling Euro can be considered a safer bet in a volatile market than selling options. The risk in selling puts, for example, can be essentially bottomless if the downward direction of the Euro, or any currency, accelerates.