How do Foreign Currency Options Work?

http://www.options-trading-education.com/24439/how-do-foreign-currency-options-work/ How do Foreign Currency Options Work? Options trading and all of its advantages can be applied to stocks, commodities, futures and foreign currency trading. How do foreign currency options work and how can you make money in Forex options trading? Foreign Currency Options Foreign currency options trading follows the same rules and tactics as stock options trading and commodity options trading. In using options to trade foreign currencies traders enjoy the same benefits of options trading that they enjoy when trading other equities. Because traders only invest a premium when they buy an options contract they limit their risk to the amount of the premium. Because in foreign currency options trading a trader can exit his position by executing the opposite contract he need never purchase the currency in question. His percentage of return on invested capital can be substantially higher than for someone who buys and sells currency directly. In addition a trader who holds a currency such as the US dollar can sell calls on the dollar with any other currency. He will do this if he believes that the dollar will not rise in price. If he is correct he will collect the premium paid for the options contract and retain his investment capital. If he reads the market incorrectly he will need to sell his dollars for another currency as the buyer of the options contract will execute the contract and buy his dollars with Yen, Euros, British Pounds, or whatever currency was paired with the dollar in the options contract. He will still gain his premium but might miss out on a rally in the dollar. Foreign Currency Calls and Puts When a currency trader believes that the euro will go up in relation to the US dollar he can buy euros with dollars. Or he can buy calls on the Euro with dollars. In either case he benefits if the euro rises. However, if the euro falls against the dollar the person who buys euros loses money and the loss can be significant. However, the person who buys calls on the euro in this case will only lose the premium paid for the options contract. Likewise if a trader believes that the euro will fall compared the dollar he can buy puts on the euro with dollars. If the euro falls he wins and if the euro rises his loss is limited to the premium paid for the contract. Fundamentals The fundamentals that drive currency value include the strength of a nation’s economy, its balance of trade and monetary policy. Foreign currency options traders do well to be well verses in these factors when relying on fundamentals for making trading decisions. Technical Trading Although fundamentals determine the final value in a currency pair such as the USD EUR technical factors drive minute by minute prices. Traders learn to use statistical analysis tools to read the ebb and flow of the market and trade foreign currency options accordingly. https://youtu.be/UzB2y75UfVg

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