Currency Option Trading - The Low Down
Currency trading is a huge market around the world due to globalization. As the trading in this market has increased it has caused the interest in currency option trading to grow as well. Options on currencies give the holder the right to buy(call) the currency at a set price called the strike price. The option has a set expiration date. If the currency price moves higher before expiration the option can be exercised. The currency is purchased to be resold in the market at a higer price. Put options are purchased if the currency price is expected to fall. If it does, the holder can purchase the currency in the market and put(sell) it at the higher 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.
The SPOT contract is another type used in currency option trading. It is a "single payment option trade." This means that if for example you feel that the euro will advance against the dollar and you buy calls on it, if you are right you do not need to actually purchase the currenct=y and sell in the market to make a profit. The profit from the option is automatically deposited in your trading account. Brokers charge a higher premium for trading this type of contract, however for speculators is the easiest way to trade.
The amount the broker charges for the option is the premium level. Several things will affect the premium level. The strike price is one of them. The closer it is to the market price the higher the premium will be. The more time until expiration the higher the premium. Highly volatile currencies will likely have higher option premiums.
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.
Currency option trading can be a hugely profitable experience if your predictions are correct because premiums are lower than deposits for the actual currencies. The time frame restraint is a challenge though. If your learn to make accurate calls on price movement however, you can make large profits. - 23218
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.
The SPOT contract is another type used in currency option trading. It is a "single payment option trade." This means that if for example you feel that the euro will advance against the dollar and you buy calls on it, if you are right you do not need to actually purchase the currenct=y and sell in the market to make a profit. The profit from the option is automatically deposited in your trading account. Brokers charge a higher premium for trading this type of contract, however for speculators is the easiest way to trade.
The amount the broker charges for the option is the premium level. Several things will affect the premium level. The strike price is one of them. The closer it is to the market price the higher the premium will be. The more time until expiration the higher the premium. Highly volatile currencies will likely have higher option premiums.
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.
Currency option trading can be a hugely profitable experience if your predictions are correct because premiums are lower than deposits for the actual currencies. The time frame restraint is a challenge though. If your learn to make accurate calls on price movement however, you can make large profits. - 23218
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Before you proceed with currency option trading be SURE to read up on currency forex market trading!
posted by X - Men @ 2:25 AM
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