If you want to generate a little extra ready money trading on the foreign exchange, you will want to understand a bit about the industry. Trade with self-confidence when you are taught exceptional tips here.
For someone starting out afresh in Forex trading may have multiple questions about currency options trading. One of the first things you will get to learn is that in options trading not many Forex brokers will allow the sale of options contracts, You will need a fair amount of money invested upfront if this is going to be the case. This is because they are an extremely risky form of options trading. The second thing to know is that there are about 3 billion options traded each year. There are advantages and disadvantages to these types of trading. When thinking about trading in this arena you will need to have a thorough knowledge and understanding about how options trading functions and what the actual risks of trading are.
Forex trading involves trading currency pairs. It is fast, volatile, and is in constant motion. Options trading is adding an extra layer of activity to this already fast moving market. “Standard” or “vanilla” trading options are the most commonly used. It is fairly straight forward. You have the face amount, an option put/call, an expiration, a strike (this is what the trade will be by the expiration) and an exercise.
The ability to sell currency at a certain exchange rate on a future date (expiration date) is called a “put/call”. You, the trader, have a right to sell, but not an obligation. The option expires worthless if the put rate runs out of money. Expiration dates are set at one week, a month, 3 months, six months, and a year.
When an option can only be exercised on the last day of its life, it is called a “European” exercise. When exercised, the currency option triggers a cash trade (SPOT) done at the “strike” (what you thought it would be) and for settlement on the spot value date.
An “American” exercise can be sold at any time prior to the expiration date. These are valued differently than European exercise. They can be priced using binomial option pricing models or using a variety of numerical approximation techniques.
Options trading that has non-standard features are called “Exotic Options.” These are very popular with the most popular being the “barrier” or “knock-out” option. These options have a barrier exchange rate (out-strike) and if the option is breached at any time during its life (before the expiration date), it is killed.
Other types of options trading that you will hear about are Double Barrier options, Double Barrier Range Binary Options, Average Rate Options, Qantas Options (popular for hedging), Binary Options, and Compound Options (these are simply options on the options). You will find a lot of hybrids and variables that are traded as well, so this is not a complete list of the types of currency options that are being used.
The advantages that you will hear about with this type of trading is that trades provide more leveraging power which makes them cost-efficient, they are lower risk because they cost less (the relativity argument), and they can be used to hedge against reversals that may occur in exchange rates.
Before jumping into the deep end of this pool, it is very important that you have a clear understanding of how currency options trading functions and what the actual risks are. Researching each of the options and talking to traders who have used these options will allow you to set up the realistic expectation of what your gains or losses will be. Learning about options trading will require that you take some classes in advanced Forex trading and have an amount of money available that you are comfortable using for these high-risk ventures.