Not only does the stock market provide you with options, the forex market also has options to offer. The options perform the role of securities for a forex trader to limit their risks and hence increase profits.
Types of Options:
Options can be classified under 2 broad categories-
- Call/ Put Options: These options give the right to the trader to buy or sell an asset during a specific period of time at a fixed price. At no time will the trader be accountable to buy or sell his options. He can even choose to keep the options till it expires. When we talk about Forex Options, we refer to the underlying assets (or currencies) to be bought or sold with another currency.
- SPOT Options (or Single Payment Option Trading): These Options have a different mode of operation. Here the investor (or buyer/holder) is quoted a premium depending upon a scenario given to the broker. A scenario can be a currency exchange, an exchange rate and time duration. The moment the scenario is established, the holder receives a payout.
The Option conversion is in the form of cash. The SPOT Options differ from traditional Options as they offer an increased number of choices, easy to purchase, and above all automatic payout. The only shortcoming of SPOT Options over traditional Options is higher premiums.
Advantages and Disadvantages of Trading Options
The Forex Options create an appealing environment for the traders to trade in.
Let us take a glance at some positive features –
- The premium price paid when the Options are purchased is more compared to the investment risks involved.
- These Options increase the potential profit margins.
- The upfront payments charged by SPOT Options are lower than the other forex Options.
- Once purchased, the buyer can choose the rate and expiration dates of these Options.
- They reduce the risks due to losses by creating a safe haven for the cash positions.
- Options which follow the predicted market movement can be purchased on reduced upfront cost and minimal risks.
- The premium quoted is influenced by the risk ratio anticipated by strike price and Option expiration.
- SPOT Options cannot be negotiated once purchased.
- Timing plays an important role on the Options based on their expirations.
- If you’re looking at a healthy long-term financial strategy, Options are not the right choice.