forex trading

Currency option trading is a way to trade the moves in the currency market with a reduced exposure to risk. Rather than buying or selling an actual currency, the option trader can purchase a call or a put on it. If he/she believes the price will move higher they can purchase a call giving them the right to buy(call) the currency at the stated strike price. This right exists for only a specified time frame. If the market price is higher than the strike price the currency can be sold right away in the market at a profit. If the trader feels the currency price is too high he/she can buy a put on it. They then have the right to sell the currency at the stated strike price. If the market price is lower within the time frame that the option is active the currency is purchased lower in the market and sold(put) at the option strike price.

One type of option contract used by speculators and hedgers is the traditional option. This contract requires the trader to set a strike price and an expiration date. These two factors along with the currency volatility level are used to determine the premium the broker charges for the option. If the premium is agreed upon the transaction is completed. If the currency pair being traded is the USD/CHF and the trader thinks the Swiss franc will move up against the dollar he/she will purchase a put on the dollar. If the prediction is correct in the set time frame, the trader will purchase the dollar and put(sell) it at the strike price realizing a profit.

SPOT contracts are used to make trading a bit easier. The actual purchase of the currency is not required in this type of contract. If the currency you purchased a call on moves up the profits from the trade are credited to your account automatically. The same thing happens with the put. The profit is simply determined and the amount deposited into your trading account. If your trade does not work, the only amount you lose is the premium.

If the current price of the currency in the market is close to the strike price of the option the premium will be higher. The more time until expiration date the higher the premium will be. Volatility in the underlying currency price is also a factor in determining premiums. The higher the volatility the higher the premium.

One reason people get involved in currency option trading is simply to speculate on the price movements of the currency. These people are solely profit driven. This is the largest part of the market.

Many corporations use hedging as a means to temper the affects of price volatility between their currency and the currency used by foreign trading partners. This is done in an attempt to protect the profits they make from their own businesses.

Although the safest way to trade currency options to buy puts or buy calls some people sell these instruments short hoping that they just expire. The potential for losing money is very high. Large cash deposits are required for this type of trading because the level of risk is high.

As we have discussed, currency option trading can be a very profitable venture if you trade correctly. Premiums on options are typically smaller than deposits for the actual currency so profits can be large. One of the primary benefits is that with options you can limit your loses.

forex trading

currency trading

currency trading

forex trading: fx trading

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