FOREX Trading
• What Is
FOREX?
• FOREX
Or Futures?
• FOREX
Or Stocks?
•
FOREX Trading for
Beginners
• FOREX
Terms To Know
•
Preparing for FOREX
Trading
• Is
FOREX Trading Risky?
•
The Philosophy of FOREX
Trading
•
FOREX and Fundamental
Analysis
•
Tools for FOREX Trading
•
Trading Strategies for
FOREX
• Trading Systems
for FOREX
•
Reading and Understanding
FOREX Quotes
•
FOREX Profits and Losses
•
FOREX Technical Analysis
Part 1
•
FOREX Technical Analysis
Part 2
•
FOREX Trading Brokers
• The
FOREX Margin
•
What Are Currency Options?
•
What Are FOREX Signals?
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Online FOREX Trading
What Are Currency Options?
Just as you can purchase stock options in the stock market, you can purchase
currency options in the FOREX market. An option gives you the right to buy
or sell a currency in a specified time frame, but does not obligate you to
do so. Currency options are often used to minimize risk. As in the stock
market, there are call options and put options. A put option gives you the
right to sell, and a call option gives you the right to buy.
What is an option worth? It is worth the value that the holder of the option
realizes while exercising the option. The intrinsic value, however, is the
value of the option at anytime the holder is not exercising the option, but
the profit or loss that may be realized if the option was in fact
exercised.
The strike price is the value of the currency in the option contract. If
the current, or spot price of the currency is below the strick price, a put
option has intrinsic value. If it is above the strike price, a call option
has intrinsic value. If there is intrinsic value in an option contract, it
is 'in the money.' Options are typically exercised when they are in the
money.
There is a very complicated formula for figuring the price of a currency
option. The spot value and the time value must both be considered. The time
value is determined by looking at the expected market conditions and the
difference in interest rates between the two currencies. The spot value,
of course, is the current price of the currency. The seller or guarantor
of an option is called a writer.
Purchasing a currency option can protect you against loss in the event of
unexpected market moves. If the market moves in a way that works against
the option, your only loss is the cost of the option. Selling an option,
however, works the opposite way, as sellers are open to unlimited loss.
A currency option is basically a hedging tool, and there are numerous types
of options that are available. A special type of option in the FOREX market
is the Digital Option. This type of option pays nothing if certain criteria
are not met, but pays a specified amount if the requirements are met.
Many agree that these are the safest and least complicated types of options,
but before you use a digital option, you must first determine which way the
market is going. A time frame must be determined, as well as the payoff.
This is how the cost of the option is determined.
Here is a prime example of a digital put option: The price of the USD is
currently at 1.1500. You expect it to go up to 1.1900 in two months. The
price of the option is $800, and the payoff is $5000. Now, if the USD does
in fact go up, as expected, you get $5000 at the end of those two months,
but if it doesn't, you are out the $800 you paid for the option.
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