Options Trading Education » Forex Options Trading

Stock and Forex Options

Jim Walker — Sat, 15 Jan 2011 18:41:34 +0000

As the US economy shows signs of a sustained recovery, debt concerns heighten in the European Union. During the last year both stock and Forex options provided speculators with a means of profiting from the volatility inherent in the post recession economic world. International businesses, that typically use options to hedge currency risk, continue to use Forex options. Speculators in Forex also are finding profits in the continued discomfort of the European Community currency. However, improving corporate earnings and slowing improving reports on the US economy are reducing US stock market volatility and, therefore, the reliance of many investors on stock options as a hedge against market risk. Stock and Forex options were both a good bet last year. How will stock and Forex options compare in the year or years to come? How to trade Forex may well heavily rely upon options until the PIIGS debt crisis settles down. How to trade stock options may become more of a matter of anticipating profits than strictly as a hedge against investment risk.

In a rising market options traders typically find themselves buying calls on promising stocks. Writing puts in options trading could become more profitable if the market gets up a head of steam and drives upwards. Of course the trader needs to remind himself of the risk of an occasional substantial loss in writing options versus buying them. The trader who buys calls or puts will only lose the price of the options premium if he misjudges the course of a stock’s price. The options writer is paid for taking on the obligation to sell in the case of calls and buy in the case of puts no matter how far the stock price may diverge from the strike price in the options contract. Choosing between stock and Forex options will have a bit to do with where the trader has his expertise. It will also have to do with the likelihood of continuing uncertainty about the Euro versus the apparent stability and growth in the recovering US stock market.

For the trader interested, still, in trading both US stock and Forex options there are advantages and efficiencies involved. The trader will need to keep in touch with fundamentals of the economies of the countries whose currencies he trades. For anyone trading the US dollar this means keeping track of a lot of the same general economic information that a US stock or stock options trader follows. To the extent that a US stock options trader follows foreign companies, especially European ones, that trade as American Depository Receipts on the NYSE, following European economic reports can be done for both Forex options trading of the Euro as well as stock and options trading. The mechanics of when to buy calls or when to buy puts in both stock and Forex options has not changed, only the economic and debt data. The options trader of both stock and Forex options who takes the long view of things will recognize cycles in recession and recovery and will be able to improve his options trading accordingly.

More Resources

Yuan Options Trading

Jim Walker — Thu, 16 Dec 2010 13:40:07 +0000

Western news sources quote the Shanghai Daily as saying that the Chinese government will soon allow Yuan options trading within China. Because hedging foreign currencies is a common and effective means of reducing currency risk in international business one can expect to see Chinese companies taking advantage of Yuan options trading in China when it starts in 2011. As China’s economy and those of others in Asia lead the world out of the recession the Yuan may well continue to rise in value versus the dollar, Yen, Euro, and others. As China has allowed the Yuan to rise Western governments have been pleased at the fact that a stronger Yuan will make Western products more competitive on the world stage. To start Yuan options trading China will need to set up rules, regulations, and the options trading infrastructure necessary for trading. How to trade options, specifically, on Yuan will have to wait for the Chinese to set up the necessary paperwork not to mention regulatory agencies. The Shanghai daily notes that trading may well start in mid February.

These may well be good times for trading options on the Yuan as increased in country trading of the Yuan against other currencies may cause the Yuan to float to its real market value. Those traders who can correctly anticipate price direction and trade market fluctuation accurately will likely profit. Any increased trading of the Chinese currency will be a welcome sign for the West, especially the USA. China has followed the path of Japan and Taiwan over the years in buying dollars and US Treasuries in order to artificially support the price of the dollar against its own currency. This is an export driven strategy in that it keeps the Yuan, also known as the Renmibi, low. This makes Chinese products less expensive in overseas markets and has greatly assisted China’s rise as an industrial state. China has been, of late, gradually loosening its controls on its currency. Part of this may be in response to political pressure and threats of trade sanctions from the West. Part is likely also because China imports raw materials which are more expensive because of its policy of keeping the value of the Yuan low. As China becomes more prosperous it is also importing more consumer goods from across the world. Any move to allow the Yuan to float to its true market value will probably make imported consumer goods cheaper in China. Those choosing to engage in Yuan options trading may well prosper as the currency seeks its true value.

Succeeding in options trading of the Yuan will require the usual due diligence of keeping in touch with fundamentals and watching technical price patterns to spot trading opportunities. The addition of many Chinese companies trading the Yuan in various currency pairs against foreign currencies could well increase trade volume substantially. Higher trade volume in Yuan options trading will likely lead to a more liquid market and more predictable trading. Higher volume will typically make technical trading more accurate and profitable as well.

More Resources

Is Trading Currency Options Risky?

T.D. Thompson — Sun, 17 Oct 2010 15:18:19 +0000

Is trading currency options risky? If you assume that trading foreign exchange options is easy and approach it that way then, yes, it is risky. If you prepare yourself and learn the trade then making a living trading options on currencies is absolutely possible. The first thing to remember when posing the question “is trading currency options risky?” is that all investment carries risk and that learning risk management is a large part of successful options trading.

The basic risk of trading currency options is that of trading currency pairs in foreign exchange. The trader should know and understand the economic, political, and central bank policy factors that drive the value of a nation’s currency. The other major factor has to do with the kinds of options trading in which a trader engages. Is trading currency options risk when you are buying puts or calls? The risk is limited to the price of the premium. Is trading currency options risky when you are selling puts or calls? When selling options the risk is potentially unlimited and is typically the province of large institutional traders with very substantial financial reserves.

How is trading currency options risky as relates to a nation’s economy? An excellent example is matter of sovereign debt among the nations of the European Community. For those who correctly anticipated the fall in the value of the Euro versus other currencies the PIIGS (Portugal, Italy, Ireland, Greece, Spain) debt issue led to good times for trading options in the Dollar, the Yen, or the Swiss franc versus the Euro. For those who were caught unawares the results were often devastating. The question might be posed as follows. If you don’t pay attention to your options trades is trading currency options risky? Then the answer is a resounding yes. Like all options trading you need to stay tuned in to what is going on in the nations whose currencies you trade. To the extent that you have purchased options the risk only lies in the premium paid and the risk can be less than if you trade the currencies directly. If you have sold options you need to be able exit the options trade as soon as possible in order to limit your losses.

A currency option gives the buyer of a call option the right to buy one currency with another at a specified price no matter where the market may take the relative values of the two currencies. It gives the buyer of a put option the right to sell. In neither case does buying an option confer an obligation. The risk is in losing the premium paid. When is trading currency options risky? In selling puts or calls the trader takes on the obligation to buy in the case of a put or sell in the case of a call if the buyer so chooses. The buyer will choose to execute the contract if it is profitable to do so. That means that the seller will incur a loss which can be substantial in the case of a large shift in relative values of the currencies involved. The best risk management in option trading for beginners is probably to avoid selling puts and calls altogether, even though in the long run selling options tends to be more profitable than buying them.

More Resources

How to Trade the Forex Market Using Binary Options

T.D. Thompson — Fri, 05 Feb 2010 01:57:15 +0000

It is no secret that the Forex market can be a very profitable place to be if you want to make money by trading currencies.

However, it is also no secret that achieving consistency within the Forex market requires a lot of preparation (you need education and reliable trading tools) because not only you need to have a good idea of where the price is about to move, but also how far it is going to go.

For instance if you are trading the EUR/USD pair and you decide it is a good idea to go long, you would place a “buy” order, because you are expecting the price of the Euro against the dollar to go up.

If you placed your trade using 1 mini lot (this equals $1 profit for every pip), and your target for that trade is 30 pips, you would need to have at least $1,000 in your account to meet margin requirements and allow some room for drawdown, and if the trade is successful you will make $30 in profits.

However, in order for this to happen the price of the Euro has to move 30 pips against the dollar, otherwise you will not reach the intended target and realize the profits. As you can see, if you trade the Forex market using the traditional approach you will have not only to predict where the price is going, but also how far it is going, which simply makes it twice as difficult.

Now, if you have $1,000 in a binary options trading account, what would you need in order to place a successful trade, and moreover, what kind of profits a successful trade would deliver for you?

In order to answer this question, let us assume that the price of the EUR/USD is at 1.47849 and based a given analysis of the market (e.g. swing trading pattern recognition) you think that the Euro is trending up against the Dollar.

In this case you would go long as well, but instead of placing a “buy” order for currency, you would simply buy a $100 call option for the EUR/USD pair with a 1 hour expiration. If you are right and the price goes up, even if it is only 0.001 pip above the price you purchased your call option (which is the strike price), and it remains there or above until expiration, you would get as much as 75% return on your $100 investment.

In other words, a single $100 trade could easily deliver $75 in profits and you could repeat this process several times during the day.

But the remarkable thing here is that you did not need the price to go up 30 pips in 1 hour to get a 75% return on your investment, you only needed 0.001 points of variation to achieve this.

In this scenario you certainly had to determine in what direction the price was going to move (this is usually an ingredient of the trading process) BUT your forecast did not have to take you all the way to a 30 pips increase in the price in order for you to make get the expected return, because you got it with just 0.001 points of variation, and you made $75 instead of $30.

Also, you can open a binary options account with only $100 and you can trade with as little as $30 with no commissions charges.

So as you can see, the potential of Forex trading through binary options is huge and the process is far simpler thus increasing your chances for profitable trades, however, you do need to have a sense of where the market is going. Provided that you have this, you are likely to make take far more winning trades than losing ones and a lot more money as well.

Forex Online Option Trading – Currency Trading Strategies

T.D. Thompson — Sat, 26 Dec 2009 17:13:30 +0000

Forex online option trading was introduced for investors wanting to deal in world currencies. It was brought into effect by the Philadelphia exchange, and the options were traded in the similar fashion as any other option.

The reason for introducing this trading system was to lessen the burden and risk of trading currencies through Forex market makers and in the form of futures. This method of trading is offered virtually by any online broker who has his dealings in options. Similar to stock option, investors need to know the symbol to search for a chain or chart. Currencies are represented differently in Forex online option, for e.g. Euro and USD is represented as XDE.

The reason to use Forex online option trading is that it provides the investor with some advantages. The risk in this form of trading is less, relating only to the amount of the premium and a stop can be employed to reduce any further loss. The currencies option feature gives the investor to stay in a secure position for a longer duration. There is only a limited amount of risk, while the chance of making profits is unlimited. The currency option helps in identifying the way of the trend and it guides the investor in buying while the markets are up and vice-versa.

So, if you want to deal in currencies but are wary of doing it through Forex market makers and futures, Forex online option trading is the ideal alternative for you.

Forex Option Trading Minimizes Foreign Currency Risks in Forex Trading

T.D. Thompson — Mon, 21 Dec 2009 19:14:56 +0000

The Forex Option trading market was initially utilized by large international banks and companies as a buffer for their exposure to various foreign currencies in the world market. Today, with an approximate 4 trillion dollars traded on the foreign exchange market daily, many other small players have entered in to the playing field in the hopes of making their own fortune trading foreign currency.

One of the many advantages of options is that it could be traded online without much of a hassle. There are many brokers that saw the advantage that trading in options could bring in terms of profits, and they started offering options trading, as well.

Forex option trading makes for smart investing. As only the price of the option itself is at stake, the trader minimizes his risks and maximizes his profits without having to deal with market makers and futures, which are even more complicated.

With Forex options, a trader could buy or sell certain spot contracts at a fixed price and at a certain date. The trader could sell the options before it expires, or secure a position within the spot foreign currency. Once the option is exercised, the spot market immediately assumes a “spot” position.

Once an option is purchased, the buying trader must pay the selling trader the initial financial investment. Once an option is purchased in Forex option trading, no other financial obligation will need to be met until the time for the option contract expires. As soon as the expiration date appears on the horizon, the buyer of the option will need to purchase the currency’s spot position, or sell the option at its strike price.