Forex Online Option Trading

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.

Forex Online Option Trading

Foreign Currency Options Trading

Three Ways You Can Do Foreign Currency Options Trading Today

From a choice of underlying financial markets, foreign currency options trading would have to be the most obscure. Although forex options are the most highly traded derivative in the world by volume, most of it is done ‘over the counter’ by banks and not through exchanges available to the public. So if you aspire to engage in foreign currency options trading, you need to choose from one of the following alternatives:

1. Find a market maker (probably a bank like Saxobank) that offers vanilla options as part of its suite of trading instruments. Vanilla options is the term used to describe regular option contracts, as opposed to the more exotic types.

2. Explore the futures market and look for options on currency futures contracts. These operate in a similar manner to commodity futures options. Most reputable options brokers include these in their selection of tradable securities.

3. Choose binary options associated with the forex market. Binary option contracts are generally very short term trades with an “all or none” outcome.

Each of the above approaches involves a different set of rules including varying leverage, structure and outcomes. Vanilla options from a market maker would be the most straightforward and anyone familiar with stock options should quickly be able to transfer the principles across to this method of foreign currency options trading.

Futures contracts already have leverage built into them, so currency futures options means leverage upon leverage. You should first understand how these deals are structured so that you can correctly calculate your potential risk to reward ratio.

Binary options are often intraday trades – for example, you may believe the AUDUSD will exceed parity by 2pm today. If you are correct, your binary option contract could return over 100 percent profit; if not, you may only receive about 10 percent of your investment back and the contract is concluded.

Foreign Currency Options Trading

Understand What Drives the Spot Market Before Doing Foreign Currency Options Trading

Whatever your preferred choice of foreign currency options trading, your success or failure will depend on your knowledge of the various factors that drive the underlying forex spot market, including economic news and announcements about things such as interest rates, employment, GDP output and the like – all of which can dramatically affect currency pair exchange rates.

In addition, you should know that foreign currency trades “around the clock” five days per week. There are times when the forex market is prone to move some currencies quickly and decisively – including the London and New York opening times for the USD, the GBP and the EUR. Any other currency in association with these three will be affected.

On the other hand, the JPY, AUD and NZD are sensitive to the Asian session, when the Tokyo and Singapore markets open. Between the opening of all markets you get the quieter trading times, which are more suitable for scalping strategies.

Foreign currency options trading strategies can also include using the options “greeks” such as the “delta” in combination with holding position sizes in the forex spot market that bring the delta back to neutral. The principle is similar to stock option delta neutral trading strategies.

A final word about forex options – do your homework, understand exactly how your forex options trading system works by paper trading with your chosen broker or market maker for a few months before committing any real money.

Currency Futures Options

Currency Futures Options – Is it the Best Way to Trade Forex?

Before deciding whether it is worth your while trading currency futures options you should first understand the nature of currency futures and their associated risks. Currency futures options are becoming less popular since the appearance of many brokers that allow you to trade the spot price of a currency pair, (as opposed to a future price at a specified date) with the same degree of leverage but without the same risk that comes with futures contracts.

If all currencies were fixed in value relative to one another, there would be no need or opportunity for currency futures or their offshoot, currency futures options. Because currencies rise and fall in value on a continuing basis, there is a corresponding need for international commerce to guard against currency fluctuations that might significantly alter their profitability on sales that are denominated in one currency, but transferred back to a home currency, which may be falling in relative value.

This can lead to substantial effective losses, so large organizations and government seek to hedged their risk by using forex futures options that essentially fix the exchange rate in place, in return for a small premium. Certainty thus becomes a major factor in this sort of trade.

Currency Futures Options

Trading Currency Futures Options

Another but increasingly less popular reason why people trade in currency futures involves pure speculation. This is where professional currency traders bet on the rise and fall of various national currencies based upon their understanding of the likely movement in currency values as laid out in published economic data.

Currency pairs are about the value of one currency compared with another. These are affected by many factors but in the end, it’s all about supply and demand. Economic conditions and important announcements are a major factor affecting the relationship of one currency to another. For example, a rise in interest rates payable by one country as opposed to those offered by another, can lead to monetary shifts. Other economic conditions such as rising inflation or demand for one country’s resources affect currency fluctuations. Political considerations can also alter the perceived value of a currency. The result is an ever-shifting balance between individual currencies.

Currency futures options are an alternative trading or hedging vehicle built upon the basic principle of futures contracts. They give traders the right, but not the obligation, to buy currency 2 at a set price denominated in currency 1. If this turns out to be a profitable transaction, the option is exercised. If it is out-of-the-money upon expiration, the trader simply declines to exercise his option, and takes the small loss involved in purchase of the option.

The net benefit of currency futures options as opposed to currency futures contracts is therefore one of less profitability due to the payment of the option price, in return for greater security through insulation from the mandatory delivery nature of futures contracts.

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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

World Currency Options

The Best Ways to Trade World Currency Options

World currency options, often called foreign currency options or forex options, function in exactly the same way as stock or futures options, except the underlying asset is the current value of one world currency against another. Currencies and their associated options form the largest and most liquid financial market in the world. Trouble is, most of the trading is not done through exchanges where all can participate but “over the counter” i.e. directly through participating banks.

However, a small portion of world currency options are traded on major exchanges such as the Philadelphia Stock Exchange in the USA or the International Securities Exchange in Germany. A “back-door” way of trading world currency options is to do it via the futures markets. Futures contracts are better known for their connection with the commodities markets but you can also trade currency futures and therefore currency futures options using brokers who have access to the Chicago Mercantile Exchange.

Another way of trading world currency options is by understanding how binary options work. These are slightly different to regular options, primarily because there are only two outcomes (hence the name binary) – you either get paid or you don’t. They are usually short term trades but when they pay, the return on risk is quite spectacular. The point is, the binary options market includes foreign currency pairs.

World Currency Options

World Currency Options – An Example

Imagine you’re a US manufacturing firm who exports to the UK but you’re unsure when you’ll receive payment. So you want to use options on the GBP/USD pair to hedge against fluctuating currency prices. One contract could give you the right to sell one million pounds in exchange for US$1,500,000, up to a given expiration date. This would mean the strike price is 1.50 US Dollars per British pound. This contract would form a dual purpose – a call on dollars and a put on pounds sterling. Since the determining currency is the British Pound, it would normally be called a GBPUSD put option.

When expiration date arrives, let’s say the dollar has become stronger against the pound so that one pound sterling now only buys $1.40 US Dollars. The owner of the currency option contract has the right to sell one million pounds for $1.50 per pound and immediately buy it back at the spot market rate of $1.40 making a profit of $100,000 US Dollars in the process.

So there’s the theory done. If your interest is in trading foreign currency options as a private trader, then please return to the Forex Options Trading main contents page and peruse the various page headings.

Forex Options Brokers

So You’re Looking for Some Good Forex Options Brokers!

Forex Options Brokers give you a little more than traditional forex brokers because they also provide the ability to choose options on foreign currencies as either an alternative financial instrument to the spot market, or as a hedge for existing leveraged spot positions.

Most foreign currency brokers don’t boldly advertise their willingness to include options as part of your trading suite, firstly because they are less well known and second, because it is more marketable for them to make their commissions on the spread rather than having to charge a fixed transaction fee for the option trade itself.

Here are a list of forex options brokers

we have found that are recommended by real people who are using them for options trades on currency pairs:

1. Saxo Bank – www.saxobank.com

Saxo Bank is located in Europe but also have offices in Sydney, Tokyo and Singapore. They provide live streaming forex options quotes through their trading platform on nine major currency pairs. They claim to be able to provide larger strike price ranges together with longer expiration dates than other brokers. They don’t charge commissions on the trades but build it into the option spread, unless the trade is low value in which case there is a $US10 fee. Forex options expiring in the money are converted to a spot position but a trader may choose to convert it to cash by exiting at the mid price.

Forex Options Brokers

2. ThinkorSwim – www.thinkorswim.com

ThinkorSwim is located in the USA and are part of the Ameritrade Group. Their downloadable trading platform is second to none for options and includes advanced options analysis capabilities which makes them one of the best forex options brokers around. Unfortunately, you cannot join ThinkorSwim if you are a UK resident but you can from most other countries. The way you trade forex options with ThinkorSwim is to select options on futures, followed by the currency of your choice. Options on currency futures are not as liquid as stock options but you can utilise some of the more popular option trading strategies with them.

3. IG Markets – www.igmarkets.com

IG Markets are a UK based brokerage firm but they have offices in all major trading countries. Their main focus is CFDs but they also include option trading on all the major forex pairs. Their platform however, doesn’t seem to be set up for more exotic options strategies, only simple open positions. You could “leg in” to an option spread or a straddle on currencies but risk slippage in the process. Nevertheless, they are a forex options broker worth considering.