Finance has become very popular in recent years, with the rising number of financial service websites touting investment advice. Although it is possible to invest directly in an index or other instrument, many turn to options because they provide a great deal of flexibility. Options are part of derivatives, which are understood to include contracts that derive their value from some underlying asset.
What are forex options?
Forex options allow investors to bet on whether the market will move up or down without committing too much capital. Profits can either be limited or unlimited depending on how high or low the price movement is within the given time frame. There are two types of options available: Call and Put options. The call option gives you the right but not obligation to buy at a set price, whereas the put option gives the holder the right but not the obligation to sell at a set price.
The first thing an investor needs to do is work out if this type of investment is appropriate. For those who like risks and thrill, this option could be ideal. Also, because options let traders buy assets at a lower cost than what they would pay for if purchased outright, it can be seen as an affordable way to gain exposure in the market. Trading should only be done if you completely understand how options work and have enough money set aside to absorb losses that may come about along the way.
Two main factors to consider before trading forex options
Two main factors need consideration: time and price.
The time factor consists of how long you want your contract to last, and the price factor is how far you expect an asset to move.
Benefits of trading forex options
A helpful point about this type of investment is that losses (for call options) and gains (for put options) are limited. In contrast, traders risk losing their entire capital if prices go south with traditional investment, like buying shares.
The UK has large numbers of firms offering forex options. Before investing in such derivative instruments, it pays to research the firm offering such services. Trading through a regulated firm will ensure transparency and security.
Key elements to consider
For traders interested in learning about forex options trading and how it can be done, a few key elements should be considered.
The first item to note is that the currency market offers binary options and Long Term and Short Term Contracts. The difference between these two types of trades is the period they occur. Price moves will generally occur much faster than other markets such as equities, commodities or fixed income securities. These price moves may happen within minutes or hours rather than days or weeks. The reason for this increased risk tolerance is because currencies rarely stay in one price range for too long (compared to, say, mining stocks). Therefore prices move and fluctuate every day.
No centralised exchange
Options trading in the currency market also has a few other differences: Firstly, there is no centralised exchange. Rather than matching buyers and sellers on one platform, these transactions occur via electronic communications networks (ECNs), using fixed pricing models.
Notably, all of this information must be understood before trading because you are not ‘trading’ anything at all when you trade currencies. Currency prices only move up and down at a price based on market expectations. They neither gain nor lose value themselves; they change in relation to one another. Beginner traders who would like to learn more about what are options in trading should contact a reputable online broker like Saxo Bank to help them get started on their investment journey.