Short Of Currency Options Trading For New Traders
A person getting their feet wet with Forex trading may be come across and become curious about currency options trading. The first thing you need to know about options trading is that very few Forex brokers allow the sale of options contracts unless a lot of money is invested upfront. This is because they are an extremely risky form of options trading. The second thing to know is that there are about 3 billion options traded each year. There are advantages and disadvantages to this types of trading. When thinking about trading in this arena you will need to have a thorough knowledge and understanding about how options trading functions and what the actual risks of trading are.
Remember, we are talking about trading currency pairs. The most common options trading is called the "standard" or "vanilla" trading options. It is very straight forward and involves the face amount in dollars, a option put/call, and option expiration, a strike (that's what the trade will be) and an exercise. So, let's break this down to see what it means.
The put/call is the currency pair you will sell at the exchange rate in the future (expiration date). You "can" sell, but you aren't obligated to. The options are worthless if the put rate runs out of money. An expiration date on options trading is done in a week, a month, 3 months, 6 months, or 12 months.
When an option can only be exercised on the last day of its life, it is call a "European" exercise. When exercised, the currency option triggers a cash trade (SPOT) done at the "strike" (what you thought it would be) and for settlement on the spot value date.
An "American" exercise can take place at any time prior to the expiration date. These are valued differently than the European exercise using different numerical approximation methods or a binomial option-pricing model.
Exotic options trading has some non-standard features. The most popular of the exotic options is the "barrier option" and "knock-out option" These options include a barrier exchange rate (out-strike) that kills the option if breached at anytime during the life of the option (before the expiration date).
Other types of options trading that you will hear about are Double Barrier options, Double Barrier Range Binary Options, Average Rate Options, Quantos Options (popular for hedging), Binary Options, and Compound Options (these are simply options on the options). You will find a lot of hybrids and variables that are traded as well, so this is not a complete list of the types of currency options that are being used.
The advantages that you will hear about with this type of trading is that trades provide more leveraging power which makes them cost efficient, they are lower risk because they cost less (the relativity argument), and they can be used to hedge against reversals that may occur in exchange rates.
When you are deciding on whether or not to participate in currency options trading it is important to have a clear understanding of the level of risk involved, the cost for trading in this forum, and have realistic expectations of what the gains will be. Taking classes and talking to successful traders will help you to decide if this is an arena you want to enter. - 23167
Remember, we are talking about trading currency pairs. The most common options trading is called the "standard" or "vanilla" trading options. It is very straight forward and involves the face amount in dollars, a option put/call, and option expiration, a strike (that's what the trade will be) and an exercise. So, let's break this down to see what it means.
The put/call is the currency pair you will sell at the exchange rate in the future (expiration date). You "can" sell, but you aren't obligated to. The options are worthless if the put rate runs out of money. An expiration date on options trading is done in a week, a month, 3 months, 6 months, or 12 months.
When an option can only be exercised on the last day of its life, it is call a "European" exercise. When exercised, the currency option triggers a cash trade (SPOT) done at the "strike" (what you thought it would be) and for settlement on the spot value date.
An "American" exercise can take place at any time prior to the expiration date. These are valued differently than the European exercise using different numerical approximation methods or a binomial option-pricing model.
Exotic options trading has some non-standard features. The most popular of the exotic options is the "barrier option" and "knock-out option" These options include a barrier exchange rate (out-strike) that kills the option if breached at anytime during the life of the option (before the expiration date).
Other types of options trading that you will hear about are Double Barrier options, Double Barrier Range Binary Options, Average Rate Options, Quantos Options (popular for hedging), Binary Options, and Compound Options (these are simply options on the options). You will find a lot of hybrids and variables that are traded as well, so this is not a complete list of the types of currency options that are being used.
The advantages that you will hear about with this type of trading is that trades provide more leveraging power which makes them cost efficient, they are lower risk because they cost less (the relativity argument), and they can be used to hedge against reversals that may occur in exchange rates.
When you are deciding on whether or not to participate in currency options trading it is important to have a clear understanding of the level of risk involved, the cost for trading in this forum, and have realistic expectations of what the gains will be. Taking classes and talking to successful traders will help you to decide if this is an arena you want to enter. - 23167
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If you need to create some more ready money trading currency, you may want to learn a bit about currency trading for dummies and forex managed accounts. Day trade with self-confidence after you discover exceptional tips from the specialists!
posted by X - Men @ 8:10 AM
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