Thursday, January 17, 2008

Forex Option Trading

There are two basic types of Forex options available to retail traders. For a broker, Forex option trading consists of the most common option, which is the call/put option. This works similarly to a stock option. The other option is a single payment option trading, also called SPOT, which allows more flexibility to traders. A broker involved in Forex option trading has traditional options that allow the right to purchase something from the option seller at a specific time and price. However, there is no obligation to purchase, just the right. For a broker, Forex option trading occurs over the counter (OTC), thus, the traders can choose the price and the date that the option is going to be valid and then they receive the quote that indicates the premium that must be paid to obtain that particular option. In the options market a trader must buy a put in conjunction with buying a call. In the options market there are two types of traditional options available to a broker in Forex option trading. One option is called American style; this option can be exercised at any time up to its expiration. The other is called European style. This option is exercised only at the time of expiration. An advantage of the traditional options is that they have lower premiums than single payment option trading. A broker in Forex option trading has more flexibility in American traditional options because they are bought and sold before expiration. However, they are more difficult to set and execute than single payment option trading. A single payment option trade works this way: the trader or broker in the Forex option trading inputs a particular scenario then gets a premium quote (option cost), and receives a payout if this particular scenario actually takes place. Single payment option trading converts your option to cash when your particular option trade has been successful thus giving you a payout for your trade. Many brokers in Forex option trading enjoy additional choices that single payment option trading gives them. In addition, these types of options are easy to trade. Simply enter the scenario and let it play it out, if you are right then cash is deposited into your account, what can be better than that! If you are not right, then the loss is simply your premium. One disadvantage of this type of option is the higher premiums. Single payment option trading premiums cost more than the standard options do. Using options can be difficult but a broker involved in a Forex trading option will use this valuable tool to increase their bottom line. Forex options are especially prominent during key economic reports or events that can cause considerable volatility. Are you interested in learning about the Forex Online Currency System? Our site provides plenty of useful information regarding Forex Trading. by T.D. Houser

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