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How to Trade Options » FOREX OPTIONS TRADING » Currency Option Trading System

Currency Option Trading System

Which Currency Option Trading System Suits You?

The best currency option trading system is one that will suit your own particular style of trading. If you’re a day trader, you might be better off simply trading the FX spot market than trying your hand at options. The FX options market and the right forex options broker provides a very versatile combination of possibilities.

Unfortunately, because currency option trading is not so well known as stock and commodity options, to my knowledge internet technology has not yet provided the same versatility in broker trading platforms. You can use more advanced option trading strategies as part of your currency option trading system, but it means you will have to “leg in” to each position, paying a commission on each one and taking on the risk of slippage.

But for the short term trader, FX options can be a relatively safe and highly lucrative way of trading. Unlike the spot market, the most you can lose is your investment amount, which means you can afford to risk a greater percentage of your trading capital, per trade. But you are still subject to all the normal rules of options, including “the terminator” – time decay.

Currency Option Trading System Example

This example will be using vanilla options. Vanilla options are your standard options, as opposed to other exotic forex option types such as binary options, currency futures options and barrier options. When expiration time arrives, you have the choice of converting them to either a spot position, or cash. The following example uses vanilla options on the GBPUSD currency pair and the bar chart below.

Currency Option Trading System

For this example we’ll be using data from the SaxoBank FX options broker site. Anyone can open a free 20 day practice account with them and, using either their web based or downloadable trading platform, get a feel for how your currency option trading system will work and the investment amounts involved.

For example, you will observe that going long a vanilla put option for 50,000 units of the GBPUSD pair with a strike price of 1.5470 and expiration date one month out, will cost you about $US792. You can then leg-in (because their platform doesn’t offer spreads) to sell another put option with same expiration but with a lower strike price of 1.5100 and receive $180. You now have an overall put debit spread with a net cost of $612 plus brokerage.

At expiration, your potential profit if the spot market is trading below 1.5100, will be (1.5470-1.5100 =) 0.037 x 50,000 = $US1850 less the $612 option premium paid for. If above 1.5470 your options expire worthless and you lose $612 plus brokerage. Let’s say $1,150 after brokerage, which is 87 percent profit on amount traded. At any time up to expiration however, you can close your positions.

Using the above as an example of the amount of leverage and risk to reward involved, we can now apply any currency option trading system we like, including straddles, credit spreads, iron condors, calendar spreads, or covered calls if you wish to combine with a spot position. Straddles are only suitable when significant economic news is pending, such as the “non-farm payroll day” on the first Friday of each month in the USA. Iron condors and calendar spreads are range trading strategies. Or we may be happy to just choose to enter simple ‘long’ positions.

Another currency option trading system might be to combine spot market positions with FX options on the same currency and use a delta neutral trading strategy such as outlined in one of the Trading Pro System videos.

Unfortunately, although SaxoBank is one of the best forex options brokers around, it’s trading platforms don’t have the ability to run risk analysis graphs, so you will need access to one from somewhere else. But being a bank and therefore a forex market maker, the liquidity and versatility of option strike prices and expiration dates they offer make them an appealing way to trade forex in your own currency.

FX Option Trading System With Binary Options

Here’s a forex option trading system with a difference. Watch this binary options trading video. You’ll see how someone makes $593 in just under one hour from 7 small forex trades. If you want more information about Binary Options Click Here.

Here’s an interesting Binary Options Video For You

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Filed Under: FOREX OPTIONS TRADING Tagged With: forex option trading system, fx option trading system

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DISCLAIMER: All stock options trading and technical analysis information on this website is for educational purposes only. While it is believed to be accurate, it should not be considered solely reliable for use in making actual investment decisions. This is neither a solicitation nor an offer to Buy/Sell futures or options. Futures and options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this video or on this website. Please read "Characteristics and Risks of Standardized Options" before investing in options. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.