Forex (Foreign Exchange) options, also referred to as Currency Options are basically a kind of contract in which the holder gains the right, but has no obligation, to buy or sell currency at a specified exchange rate during a specific time period. The holder gets this right in lieu of a certain fee or premium paid to the broker, and this premium can vary from broker to broker. It also differs depending on the number of such contracts purchased.
Why do people buy Forex Options?
Currency values can change suddenly, and that can often create huge losses to investors, especially to those whose business is dependent on foreign currencies. In this case, they all need a certain sense of security, and thus, they indulge in Forex Hedging. Currency options are one of the most effective and best ways of hedging against unexpected and sudden value changes. Most corporations and multinationals, as well as individuals like to invest a good amount of their capital in Forex Options. Most of the forex brokers consider this kind of investment.
Another thing to note is that the only downside risk to something like this is technically the premium that is paid to the broker. Apart from that, the holder has nothing to lose. Moreover, the potential for profit is endless, and you yourself get to set the price and the expiration date.
How do currency/ Forex options work?
When an individual decides to buy a currency option, he can either purchase it on a ‘put’ or ‘call’. Currencies are always traded in pairs. So as an example, if a trader believes that the USD will rise and that it will be more expensive for any EUR holding person to purchase USD, then he will purchase a currency option call contract. It would mean that when the USD rises on his USD/EUR contract, he could make profit by the increase in the exchange rate.
There are also SPOT (Single Payment Options Trading) options that a trader can buy. These have a slightly higher premium rate as compared to the other options, but they are easier to set and execute.
The traditional Forex options can be of two kinds:
- American Style – These can be exercised or executed at any time until the point of expiration.
- European Style – These can only be exercised at the time of expiration.
Needless to say, the American style traditional contracts offer more flexibility than the European style ones.
The SPOT contracts too can be of different types, such as, One-Touch SPOT, No-Touch SPOT, Digital SPOT, Double One-Touch SPOT, and Double No-Touch SPOT. All of these give enough scope to a holder to make profit.
How to get Forex Options?
Not all retail Forex brokers that one may come across provide the facility for Forex Options. It is important to find some good, trustworthy and reliable brokers that give this facility. Ideally, it makes things easier if people connect with brokers that have all Forex related services under one roof. But one can approach a different broker too for their Foeex options.