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Currency Options Trading

Currency Options: Now, there are other ways for you to trade the currencycurrency trading forex options online anna markets, and currency options are one of them. Although I do not advocate this form of trading for novice traders, I have simply added it to the site for completeness, and in the last few days I have added a dedicated site for currency options trading here, so please just follow the link.

Currency Options Trading : Introduction

Currency options are similar in many ways to other types of options such as equity options, but if you are to trade them successfully you need to understand what an option is, the obligations you take on a seller, and the rights you have as a buyer. Identifying and deciding whether options are over valued or undervalued is an art in itself, and most retail option traders have little understanding of the importance of historic and implied volatility in arriving at these decisions. So, before you start trading currency options, please learn all about options first - I have a site which is just about options.

Currency Options Trading : Basics

currency trading forex onlineIn the US, most currency options are traded through the Philadelphia Stock Exchange or the Chicago Mercantile Exchange. Now one of the questions I am often asked is why trade options, rather than spot FX, and this is one of the reasons. The option exchange is tightly regulated, the spot FX market is not! Now with equity options, the underlying asset is the stock or share, with a currency option the underlying 'asset' is a contract. On the Philadelphia Stock Exchange the underlying contract size is 10,000 units of currency and 1,000,000 for Japanese Yen. Naturally contract sizes can be much greater but this exchange has been established for the retail trader. Now an important point to note if you are going to trade this instrument is that on this exchange they are European Style ( remember most equity options are American style ) so the option cannot be exercised until the final day of trading, but can of course be traded during the contract period of the option. One of the other major differences between equity options and currency options is the contract periods - for currency options these are generally quarterly ( March, June, September and December ) with expiry taking place on the Saturday following the third Friday of the expiry month. Strike prices are generally set at half cent intervals.  So let's take a simple example as follows :

Suppose the EUR/USD is trading in the spot market at 1.3806. It is September and we see that an October call option with a strike price of 138.00 has a premium of 1.14. ( strike prices in currency options are always quoted with the decimal point moved two places to the right)  Premium is quoted at 1 point = $100. Now because contract size is 10,000 units, premium is calculated using a $100 multiplier, so the premium payable is $114. Suppose now the EUR/USD pair move to 1.4200 by expiry. Our option would now be worth $394 ( all intrinsic value as time value is zero ) and the profit on the trade would be $394-$114 = $280. Remember a call option increases in value as the underlying asset increases in price.

Now one other variation between trading currency options and spot fx trading is that options can only be traded when the exchanges are open - so you cannot trade 24 hours a day as with the spot market. The exchanges are normally open the same hours as for stock and futures trading. Now let's have a look at a currency option chain which differs from equity options chains that we have looked at elsewhere.

XDE Euro Last : 142.49 Call November        
Symbol Last Trade Change Bid Ask Volume Open Interest Strike Price
XDEKS 5.50 0.80 5.50 5.60 35 184 137.00
EPAKU     5.00 5.10 26 98 137.50
XDEKW 4.50 0.30 4.50 4.60 19 226 138.00
EPAKB     4.10 4.20 34 34 138.50

This is a much simpler option chain to read than those for equity options, and is really self explanatory. The chain is for November expiry, a call option, and for the Euro. All these options are ITM as the currency is trading at 142.49. The contract codes are shown under the symbol as for equity options. Now one final point - do you have to take delivery of the foreign currency if exercised, the answer is NO. All contracts are US dollar settled so no delivery of the foreign currency occurs.

Currency Trading Options : Exotic Currency Options

Finally, there are several 'exotic' currency options which are available for trading. I have never traded them myself, but they are quite popular, so here they are:

OK - that's it on currency options, now let's put it all together into a planned strategy to build our currency trading business in simple steps.

 

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