Forex Options Trading

Forex Options Trading
By
www.TheForexNittyGritty.com

There are three good reasons for Forex
options trading.
http://www.theforexnittygritty.com/forex-trading/
forex-options-trading

In international business transactions Forex
options trading helps hedge currency risk.

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In volatile markets Forex options trading
both helps limit risk while providing profit
potential.

And traders can use Forex options trading to
provide extra leverage for their trading
capital.

Here are snapshots of each reason for
Forex options trading.

Limiting Currency Risk

When a Japanese airline signs a contract to
buy a Boeing jet they will eventually have to
pay in US dollars.

They may already have the money but will
not pay until the jet is delivered a year or two
later.

What happens if the US Dollar rises in value
versus the Japanese Yen?

That will make the airplane more expensive.
The company could just pay up front but
they probably have good use for the money
while they are waiting.

They could also change their Yen to dollars
and wait. Alternatively they can use Forex
options trading to contain their currency risk.

The company buys calls on the US Dollar
with Yen.

The cost of this is much less than the money
put aside for the airplane. If the dollar goes
up the Japanese airline will execute the
contract and obtain the necessary amount in
dollars.

If the dollar goes down they will let the
contract expire and end up paying less for
the airplane when they convert to dollars.

This is the junction of Forex trading and
currency risk.

Staking Out Positions in a Volatile Market

There are times when it is difficult to know
which way a currency pair will go. When
there are very volatile foreign currency rates
traders can use options to limit their trading
risk and leverage their trading capital. A
basic and fairly common strategy is called a
long straddle.

A trader buys both a put and a call on one
currency with the other. If the currency pair
moves significantly in either direction the
trader will execute the put or the call and
make money.

The risk in this strategy is that the currency
pair ceases to be volatile in which case the
maximum loss is the price of the two options
contracts.

Getting a Lot for a Little

Leverage is a useful aspect of Forex options
trading. A trader limits his cost in trading to
the price of the options contract and does
not buy or sell currency.

If the currency pair moves in the expected
direction the trader need not even execute
the contract. Rather he can simply make the
opposite trade and exit the contract, taking
his profit with him.

Forex options trading allows a trader to
preserve trading capital while swing trading
currency pairs.

Technical and fundamental analysis of Forex
pairs is essential in picking the right trade
but the advantages of limiting risk and
gaining leverage make Forex options trading
attractive.

As always, and even when trading options
on currencies, stay out of trades that you do
not understand and always do your own
homework.

Forex Options Trading

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