Trade Options

The forex market had initially started off as an OTC (Over The Counter) financial instrument for international corporations, financial institutions, and larger banks as a hedge strategy for foreign currency exposure. Just like the spot market for forex trading, the options market in forex trading is considered to be an “interbank” financial market. However, with a plethora of forex options trading software and real-time financial information available to almost all investors with the advent of the Internet, the forex options market today includes an unbelievably large number of corporations and individuals who are constantly speculating and trading via online trading platforms or through telephone.

Forex options trading mainly emerged as a convenient alternative investment tool for many investors and traders. It is an investment vehicle that provides both small and large investors with more opportunities when planning an appropriate hedging and forex trading strategy to implement.

Forex options can be defined as financial currency contracts that give the contract purchaser a right to buy or sell an underlying (spot contract) at a strike price before or on its expiration date. The amount a forex option purchaser pays to the option seller to buy the rights of a particular contract is known as its “premium”.

The buyer of a forex options contract, also called its holder, can decide upon if he wishes to sell that option contract before its expiration period is over or if he wants to hold the option contract till its expiration point and use his right to acquire a place in the market of that underlying foreign currency. When a trader exercises any of his foreign currency options in order to take a subsequent underlying place in the spot market of foreign currency, it is called an “assignment” or the act of “being assigned” the spot position.

The seller of a forex option contract is also called the “grantor” or “writer” of that contract. A forex option contract seller is under an obligation of the contract to acquire the role of the opposite option spot position in case the purchaser decides to exercise his right. For the premium that the buyer pays the seller, the seller has to assume this risk of acquiring the opposite adverse position in future in the forex option spot market.

The two significant features of forex options trading – “call” and “put” are completely separate forcex options contracts. Please note that these aren’t two sides of the same coin i.e. they do not signify opposing sides of the same trade. For every forex option contract put buyer, there’s a put seller, and likewise for every forex option contract call purchaser, there’s a call seller. In every single forex option transaction, the contract purchaser pays a fixed premium to the contract seller.

A forex option expires and becomes “null”, if at the point of its expiration, the exercised price (strike price) was “out-of-the-money”. A forex option becomes “out-of-the-money” when the strike price of the call option is higher than the forex option spot price. Once the contract has expired itself, neither the seller nor the buyer is obligated to the opposite party in any way.