On the SPOT with Forex Option Trading
FOREX option trading is another opportunity for traders to participate in the currency market. FOREX is the short name for the foreign exchange market where currencies are traded 24 hours a day. You can trade in the actual currencies or you can join in Forex option trading in which currencies are the underlying assets.
Like all other options trading, there are two types of options called call and puts. But in Forex option trading there are also two types of trading: call-put and SPOT trading. SPOT stands for single payment option trading alternative. If the option is exercised in a SPOT transaction, it is automatically converted to cash. One of the advantages of SPOT Forex option trading is that you have incredible flexibility because you can name your price and the expiration date to get a premium quote. Once you know the premium amount you can then choose whether you want to follow through with the transaction.
In Forex option trading you buy options that have paired currencies as the underlying asset. Using the traditional call-put Forex trading, for example, you may buy two lots of AUD/USD which is a pairing of the Australian and U.S. dollars at a specified price. You are actually buying an AUD call and a USD put. If the exchange rate or price is less than the specified price at the time the expiration date arrives then the option is worthless. In that case you would lose the premium paid.
When Forex option trading, if the exchange rate rises above the price stated in the option then you would exercise the option. At the time the option is exercised, you will then own the lots of currencies and can sell them for a profit.
Forex option trading is attractive to traders because risk is limited while the profit potential is unlimited.
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Filed under General by on Aug 25th, 2011. 
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