FOREX OPTIONS

2008-11-13T14:13:00.000-08:00

I know most of you want to know about Option for Forex, I know most of you have no idea what is that and how´s working for all of us, but don’t worry, I was the same, but this is a little help. You can start here, so read and you will understand more about Forex world.
Actually these options are easy to use, but they can’t be used by babies. Options give retail traders many opportunities to limit risk and increase profit. They have a lot in common with the stock market business.
There are two primary types of options available to retail Forex traders. The most common is the traditional call/put option, which works much like the respective stock option. The other alternative is single payment option trading or SPOT which gives traders more flexibility.

Traditional
Traditional options allow the buyer the right but not the obligation to purchase something from the option seller at a set price and time. This is a great explanation of this, a trader might purchase an option to buy two lots of EUR/USD at 1.3000 in one month; such a contract is known as a "EUR call/USD put." (Keep in mind that, in the options market, when you buy a call, you buy a put simultaneously, just as in the cash market you buy one currency and simultaneously sell another.) If the price of EUR/USD is below 1.3000, the option expires worthless, and the buyer loses only the premium. On the other hand, if EUR/USD skyrockets to 1.4000, then the buyer can exercise the option and gain two lots for only 1.3000, which can then be sold for profit.
Since FOREX options are traded over-the-counter (OTC), traders can choose the price and date on which the option is to be valid and then receive a quote stating the premium they must pay to obtain the option.
Forex options give investors another tool which helps to minimize losses and to raise profits, they are extremely popular at periods of economic reporting. But if the currency underrates the loses of a trader they pay the premium for this option.

The second type of Forex options is called SPOT (Single Payment Options Trading). This type depends on the Forex trader; it is a forecast from the trader on what they predict is going to happen in the Forex market. If the trader is successful possible profit can be unlimited and if the SPOT is unsuccessful the trader loses only the premium.
Here is how SPOT options work: the trader inputs a scenario (for example, "EUR/USD will break 1.3000 in 12 days"), obtains a premium (option cost) quote, and then receives a payout if the scenario takes place. Essentially, SPOT automatically converts your option to cash when your option trade is successful, giving you a payout.
There are good reasons to trade with options.
o Your downside risk is limited to the option premium (the amount you paid to purchase the option).
o You have unlimited profit potential.
o You pay less money up front than for a spot (cash) FOREX position.
o You get to set the price and expiration date. (These are not predefined like those of options on futures.)
o Options can be used to hedge against open spot (cash) positions in order to limit risk.
o Without risking a lot of capital, you can use options to trade on predictions of market movements before fundamental events take place (such as economic reports or meetings).
o SPOT options allow you many choices:

¦ Standard options.
¦ One-touch SPOT – You receive a payout if the price touches a certain level.
¦ No-touch SPOT – You receive a payout if the price doesn't touch a certain level.
¦ Digital SPOT – You receive a payout if the price is above or below a certain level.
¦ Double one-touch SPOT – You receive a payout if the price touches one of two set levels.
¦ Double no-touch SPOT – You receive a payout if the price doesn't touch any of the two set levels.
The buyer is liable for any unpaid premium which is already overdue when the option is exercised or expires. The stock market is often associated with options; still the foreign exchange (FOREX) market also lets trade these sole derivatives. Retail traders many opportunities to minimize risk and increase profit thanks to options