One of the types of trading you are going to hear about when you first enter Forex is currency options trading. This type of trading is very popular with some traders and there are more than 3 billion options traded each year. However, it is also one of the types of trading that has the highest risk involved. Very few brokers will let traders sell these contracts without a lot of capital for their protection because the risk is so high. So, if you are going to get into options trading, it is important that you learn everything about it before you begin.

Remember, we are talking about trading currency pairs. The most common options trading is called the \”standard\” or \”vanilla\” trading options. It is very straight forward and involves the face amount in dollars, a option put/call, and option expiration, a strike (that\’s what the trade will be) and an exercise. So, let\’s break this down to see what it means.

The option put/call is the right to buy or sell a currency pair at a given exchange rate at some time in the future (the expiration date). A trader has a right, not an obligation to sell. If the put rate runs out of money, the options expire and are worthless. The expiration dates are usually set at one week, one month, three months, six month, and twelve months.

When you see \”European\” exercise, the option can only be exercised, or sold on the date of expiration. If it is exercised, the option turns into a cash trade or SPOT and is completed at the strike price and settled on the SPOT value date.

An \”American\” exercise can be sold at any time prior to the expiration date. These are valued differently than the European exercise. They can be priced using binomial option pricing models or using a variety of numerical approximation techniques.

Exotic options trading has some non-standard features. The most popular of the exotic options is the \”barrier option\” and \”knock-out option\” These options include a barrier exchange rate (out-strike) that kills the option if breached at anytime during the life of the option (before the expiration date).

Other types of options trading that you will hear about are Double Barrier options, Double Barrier Range Binary Options, Average Rate Options, Quantos Options (popular for hedging), Binary Options, and Compound Options (these are simply options on the options). You will find a lot of hybrids and variables that are traded as well, so this is not a complete list of the types of currency options that are being used.

The advantages of options trading that is most talked about is their increase in leveraging power which makes them cost efficient, the lower cost for this type of option which theoretically reduced the risk, and the ability to hedge against reversals in exchange rates.

When you are deciding on whether or not to participate in currency options trading it is important to have a clear understanding of the level of risk involved, the cost for trading in this forum, and have realistic expectations of what the gains will be. Taking classes and talking to successful traders will help you to decide if this is an arena you want to enter.

If you are looking to create some more money trading currency, you may want to learn a fair bit about currency day trading and currency options trading. Trade with self-confidence when you discover unique ideas from the experts!

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