Forex trading can also play options. A foreign exchange option, otherwise known as currency options, is simply called FX options for short. It refers to a specific derivative tradeable asset which reserves the right to the owner of such instrument but without an accompanying obligation to trade money in one particular currency into another currency at a pre-determined and agreed currency conversion rate on a specific pre-specified date.
Buying calls and puts are the basic moves involved in FX options trading. A call is a player’s decision to buy, whereas a put is a decision to sell. The strike price is also known as the exercise price and is the pre-agreed price at which the trader can buy or sell the underlying FX option.
A call or a put allows a leveraged position where a player in the forex options market ventures on a directional play with a limited risk to a premium paid. The main advantage of trading forex options spread is to avoid being stopped out on a position and to allow time for the position to work out. Every options trader aims to attain a powerful position at the expiration of the pre-specified trading period. This article distinguishes between two FX options trading strategies.
Trading Regular Forex Options Spreads
When a player trades forex options spreads, the goal is to limit the gains and the cost of participating in the trade. In this type of play, the most that a trader can earn is the difference between the strike prices. This move is advantageous to a player in that it conserves his or her trading capital. The main limitation, however, is that when the underlying currency goes over the strike prices, the player can not participate in the move.
Trading Calendar Spreads
In this strategy, a player puts on a call or put spread with both legs at the same or at different strike prices but at different months. In a call calendar spread, the trader predicts that the prices of the currency pair will increase within the period. Conversely, in a put spread, the trader anticipates the currency pair prices will decrease. The advantage of this strategy is that it facilitates a play on fundamental events that may take a bit longer. A good use of the calendar spread strategy is when one is anticipating a shift in a country’s economic cycle, an impending recession, or a seasonal effect that can affect currency rates to enjoy a surge or to suffer a decline.
Busy traders usually go safe with the regular spread trading strategy. Those who love to analyze or predict trends love the calendar strategy. On the whole, FX options trading is volatile and if one loves the adrenaline rush, FX options trading definitely rocks!
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