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Option Trading
When the term “option
trading” comes in a discussion, the immediate reaction
is to assume the stock market. This is no surprise; options
have been a main staple of stock trading for many years.
However, since the forex market became widely available by trading
via online brokers, option trading in the forex market has become
just as popular. The forex option market is the largest,
deepest, and most liquid of any option trading market in the entire
world. Also, in the hands of a skilled money manager, forex
option trading creates more opportunities of limiting losses and
increasing profits than in trading currency alone.
In the world of
forex option trading, there are usually two
routes to take; traditional options (call/put) and SPOT (single
payment option trading). Traditional option trading
affords the trader the right (but not obligation) to purchase
currency at a set time and price. This type of option trading is
more closely related to the stock market, and is something many
investors can already identify with. For example, an
investor may enter into an agreement (option) to buy a lot of GBP/USD in four months time at a rate of 1.9500. If in 4 months
time the price is below 1.9500, the investor considers the
option worthless and loses only the premium that was initially
put up for the option. If the price shoots to 1.9700 in 4
months’ time, however, the investor would exercise his right to
purchase one lot at 1.9500 and immediately sell the lot at
market price for 1.9700, creating 200 pips profit instantly.
SPOT (single payment option trading) is generally known as the
more flexible method when option trading, and affords the
investor many different opportunities. SPOT options work in much
the same manner as traditional options do; a contract is entered
to buy a specific currency at a specific rate in a specific
timeframe. The single main difference is that in SPOT option
trading, your option is converted to cash in the event that your
option trade was successful. Also, many different scenarios are
available for SPOT option trading:
-
One-touch SPOT – Option exercised as soon as price hits a
predefined level
-
No-touch SPOT – Option exercised if a predefined level is
not reached
-
Digital SPOT – Option exercised if price is between two
price levels
This affords the trader many opportunities to achieve exactly
the scenario that is predicted. However, the SPOT type of option
trading usually has a higher premium; the SPOT option will cost
more on average than the traditional option would.
Though it seems that there is a great deal of advantages to
forex option trading, there are a few downsides to them as well.
The premium (price that the option costs the investor) varies
according to the date of the option, the method, and the price
in which your option can be exercised, so it is sometimes
difficult to keep a specific risk to reward ratio. Also, in
option trading, it may be difficult to point the exact time and
price to be profitable due to the longer term that an option is
held, and the unpredictability of the currency market. Trends
may change from a once lucrative option, and could easily turn a
once thought profitable trade into a loss. This isn’t the
greatest news for those interested in SPOT option trading, as
once you enter into an option, it cannot be sold or traded.
Option trading in the forex market, as well as option trading
in any market, can be a very lucrative investment for those with
accurate prediction systems. Large sums of money can be pulled
out of the market almost instantly after an option is exercised,
considering the market being traded is the most liquid market
in the world. This is more than enough to make even the most experienced
traders across a broad range of markets drool. These same
salivating professionals will still tell you, however, that great
care and planning must go into each option trade, as risk of losing
a great deal of money is still very real. Any and all investment
opportunities should be approached with careful planning; soild
money management and prediction systems are the keys, and could
very well open the door to a new and exciting investment opportunity
in option stock trading.
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