Forex Online Option Trading Is EASY
Forex online option trading can easily be done these days thanks to the internet. The trick is to find the right forex options broker that best suits the style of trading you wish to participate in. There are a few different alternatives for trading foreign currency options and all of them can be done online.
1. Vanilla Forex Options
This is just another name for regular options, much the same as you would expect to find trading stock options. The underlying is a nominated quantity of the currency pair, for example, $100,000 spot value of the GBPUSD currency cross. In this example, if you believe that by option expiration date, the British Pound will increase in value against the US Dollar, you would either purchase GBPUSD call options or sell GBPUSD put options. Since the amount of the underlying covered by the options is so large and the price for the options surprisingly low, a small move will produce profit that corresponds to having purchased $100,000 worth of GBP itself.
Forex online option trading allows you to execute vanilla options trades immediately from any computer connected to the internet. Using a reputable broker such as SaxoBank will ensure access to this market. Saxobank are based in Germany but take accounts from all over the world. They are one of the few brokers who offer vanilla forex options. Most vanilla type forex options are traded “over the counter” by banks and not through exchanges, so they are not available to the general public. Saxobank however, are market makers. They don’t charge commissions but make their money from the spread, so the brokerage fees will generally be in proportion to the size of your trade. Highly recommended if you want to keep it simple.
2. Forex Binary Options
Binary options are are more exotic form of forex online option trading. Unlike vanilla options, they have an “all or nothing” characteristic attached to them. The idea is that you either win or lose – only two outcomes, hence the name “binary”. These are normally short term trades and can be done over a number of underlying assets such as stocks, commodities and indexes but including foreign currency pairs.
3. Currency Futures Options
You can also trade futures on forex pairs. Many futures contracts, including commodity futures, stock index futures and the like, also have options on them. In fact, futures are the only way the average person can trade commodities. Futures and their options are traded on the Chicago Board of Options Exchange (CBOE) in the USA and to trade them you need to find a broker that provides access to this exchange.
Forex Online Option Trading Strategy
A good strategy for trading foreign currency options is to use a non-directional approach. Using a combination of vanilla options and forex spot trading, you can set up a virtually risk free position.
You start with an at-the-money short straddle and once the trade goes through, set up a pending order to purchase and/or sell the same currency pair at the spot price on either side of the straddle trade after allowing for commissions and the amount of credit received from selling the straddle. If the price action sails away in either direction, breaching one of the spot price order levels, the superior leverage on the spot price will outperform the loss on the sold options. If it goes nowhere, you get to walk away with a credit from selling the options.
You need to keep your spot price entry points close, because the only way this type of trade can fail, is if the price action triggers a spot price buy, then retreats back to breach the spot price entry point on the other side of the straddle. Even then, the credit received from the straddle will mitigate any loss considerably.
You can implement the above strategy quite easily with SaxoBank.
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