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Forex Options are financial derivatives that are traded in the forex market. Forex options offer limited risks and increased profits if handled correctly. However, given the similarities of the same names and basic concepts, forex options are vastly different from stock options.

Most investors find forex options more appealing due to its commonly fast-paced nature as currency is constantly changing meaning higher opportunities for profit and risks as well. Other differences include the capital needed, the payment options, and volatility. These differences will be tackled more thoroughly in the next articles.

Basics of Options Trading

In order to fully comprehend forex options, let us review the basics. Options trading is composed of two transaction that may stand alone or be matched together within a contract. These are the ‘calls’ and ‘puts’. Calls and puts are the basic concept of options trading composed of buy and sell. Basically, option sellers have obligations while option buyers have rights. Here are some terminology to explain further:

Call
A call in the context of Forex Options is an arrangement or contract that gives an investor the right, but not the obligation, to buy or “call in” a financial instrument at an agreed-upon price or the strike price within an agreed-upon time period or the expiration date. In turn the seller is obliged to sell the financial instrument at the strike price.

Put
A put in the context of Forex Options is an agreement or contract that gives an investor or the owner the right, but not the obligation, to sell a financial instrument at an agreed-upon price or the strike price within an agreed-upon time or expiration date. In turn, the seller is obliged to buy the financial instrument the at the strike price.

Premium
The cost of an option up-front.

Strike Price
The strike price is the price at which the contract of a financial instrument takes effect. It is also known as the exercise price.

Exercise
The act of alerting the seller of the option buyer’s intention to deliver on the underlying forex contract of the option.


Expiration Date
The expiration date in terms of options is the last day of validity of an options contract. If no call or put hits a strike price up until the expiration date, the investor loses the money paid to buy or sell the option.

Delivery Date
The delivery date is the agreed-upon date wherein the currencies will be exchanged after exercising the option.

How to Trade Options
To paint a better picture of how option trading works, here is an example:

Let’s assume that you want to buy a put option on the EUR/USD pair which is currently at 1.1000, tracking a downward trend. Let’s also assume that today is February 4, 2015 and you suspect that volatility will occur in the next month because of a number of major reports that will be released. Because you don’t want to risk a cash position, you then go to your broker and request to buy a ‘EUR put option’ or in other words, a EUR put/USD call which you set at the strike price of 1.0900 and at the expiration date of March 4, 2015. According to the broker, it will cost you 10 pips and you go for it.

Buy: EUR put/USD call
Premium: 10 USD pips
Strike Price: 1.0900
Expiration date: March 4, 2015
Cash (spot) reference: 1.1000

Within the next month, major data has been released and the EUR/USD pair drops to 1.0850. Seeing that it has already gone down beyond the strike price, you exercise your option.

With these numbers you et a profit of 40 USD because:
1.1000 - 1.0900 - 0.0010 pips equals 0.0040 pips or 40 USD.

Conclusion

It is no wonder why Forex Options are growing in popularity. It is easy to trade with a chance of fast earnings. If you’ve done your research matched with your financial expertise, you can have unlimited profits and minimal risks. If you’re the kind of trader that’s up for the challenge, Forex Options is for you.