Forex trading attracts more and more traders every year because of all the opportunities it provides to earn substantial profits without investing too much time or effort. However, many people who are quite familiar with the Forex market still know very little about Forex options. But these instruments are very useful and potentially profitable if you are ready to learn how to use them. In this article, we explain in a few words the essence of these instruments and their potential applications.
How Forex options work
Basically, Forex options are financial instruments based on various currency pairs. These derivatives allow you to trade different currencies and earn on their price movements without being obliged to buy or sell them. These options work like this: you get the right, but not the obligation, to purchase or sell a certain currency at a certain price. If the conditions are favorable, you can use your option, and if they are negative, you can avoid losses.
You can use Forex options for hedging or speculations, and they may prove to be useful. There are a lot of various types of these options. OTC options are among the most popular derivatives: they allow you to trade assets without actually taking delivery. Their expiration dates and prices are flexible, and that’s why these options are very popular. Exchange-traded options are another popular type. These are standardized contracts for certain amounts of currencies.
However, even if you understand the basics of how FX options work, you should also understand how to use them in the most effective way. Let’s talk about the most useful strategies involving them.
When it comes to options, Forex traders usually utilize one of these three most common strategies or some combination of them. First of all, you can use Forex options for hedging. That means you use a contract to protect your existing portfolio from possible risks. For example, if you’re afraid that USD is going to go up, you can purchase a USD/EUR option to cover the risks. If it really goes up, you buy a certain quantity of USD for the fixed price. If it goes down, you abandon the option and buy it for the market price.
Forex options are also used for scalping. This strategy involves opening a short position, then closing it with tiny profit. And they are also used for positional strategy that involves holding them for very long periods of time.