A Guide to Currency Option Trading

Currency option trading is buying or selling the right - or the option - to buy or sell a given hard currency over a given time in the future. It is a high-risk investment opportunity and the only option trading that can be done 24 hours a day. 

Different Than Currency Trading

Trading in international hard currencies is a volatile, high-risk investment. Placing orders through a broker, an investor uses one currency to purchase another. The movement of either currency - up or down - can mean a gain or loss on the investment. Plus there are broker fees.

Currencies sold on the FOREX foreign exchange can move quickly and can be affected by almost any international development. Once purchased, the investor can lose money quickly or make money quickly.

Currency Option Trading

As opposed to buying one currency with another, currency option trading is where an investor buys a contract that allows him to buy or sell a given currency at a given rate for a given time. These contracts have a cost and the investor is assuming that the currency in question will have moved sufficiently within the contract period so that the purchase or sale of the currency covers the contract cost and provides a profit. The option allows the investor to make a profit on the movement of the currency in any direction if the investor has locked in the right price of the currency at the right time.

Insight Required

With currency option training, you must have insight into the trends of various international hard currencies. As outlined above, currency trading can be higher risk because the value of hard currencies can move rapidly and extensively in a short period of time. With knowledge of the general direction of a currency - even if you have recently lost money in a direct currency trade - currency option trading can let you lock in a price now and buy or sell later. This can offset short-term losses. Again, you must have knowledge of international currency movements, what moves currencies, trends likely to affect them and the ability to chose the right time and the right price for an option.

Used as a Hedge

Because straight currency trading is such a high risk asset, large-scale currency traders hedge against loss with currency option trading.

If the market for a particular currency moves in an unfavorable direction based on recent currency purchases, an option allows the investor a “second look” at the market. The option locks in a given price so that an investor can minimize or offset losses.

Pitfalls

Currency option trading can also reduce potential profit in a trade if the market has moved favorably for your currency purchase and you purchased an option to hedge in case of loss. You don’t have to exercise your option but you will be out the cost of it.

Additionally, currency option trading should only be for those well-versed in international currency trading and knowledgeable as to the various factors affecting trends in international currency prices.

blog comments powered by Disqus
Scottrade