What are FX Options? The Complete Guide IG International

Trading forex options typically takes place over the telephone or on electronic dealing systems between clients of the financial institution and the dealing desk and market makers working at the financial institution. We want to clarify that IG International does not have an official Line account at this time. We have not established any official presence on Line messaging platform. Therefore, any accounts claiming to represent IG International on Line are unauthorized and should be considered as fake. 70% of retail client accounts lose money when trading CFDs, with this investment provider. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money.

A currency trader buys a SPOT option by inputting the desired scenario (ex. “I think EUR/USD will have an exchange rate above 1.5205, 15 days from now,”) and a premium will be quoted. If the buyer purchases this option, then the SPOT will automatically pay out should the scenario occur. This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result.

However, option premiums can be quite high, your risk is unlimited when selling options, and not all FX options markets are available 24 hours a day. With IG, you’ll be using spread bets and CFDs to speculate on the price of options contracts, rather than buying or selling the underlying contracts themselves. This plus500 review means that you can go short as well as long on both call and put options – with zero overnight funding charges and no spread to pay on expiry. If a trader is taking on the obligation to sell an options contract, their losses are potentially unlimited – and profits are capped at the total value of the option premium.

What Is a Currency Option?

Foreign exchange options are a relative unknown in the retail currency world. Although some brokers offer this alternative to spot trading, most don’t. The risk for an option buyer is limited to the cost of buying the option, called the ‘premium’. Conversely, for an option seller the risk is potentially unlimited, but the profit is fixed at the premium received. Similar to other major financial markets, the forex market also has several active derivatives markets that use forex currency pairs as an underlying asset.

Get more details on how options trading works and which markets you can trade with options. Currency options are one of the most common ways for corporations, individuals or financial institutions to hedge against adverse movements in exchange rates. To be granted this right, the buyer of the option pays a premium to the seller.

Example of a Currency Option

1. You’ll also be able to trade on a large range of forex markets including some of the most popular pairs on the market.
2. Discover the range of markets and learn how they work – with IG Academy’s online course.
3. Options are available for trading in almost every type of investment that trades in a market.
4. Trading forex options involves a wide variety of strategies available for use in forex markets, where foreign currencies are traded.
5. These are great trades for the FX portfolio in order to capture a potential breakout move or lulled pause in the exchange rate.

Options strategies such as straddles, strangles, and spreads are popular methods for limiting the potential of loss in a currency trade. If the expiry arrives and the market price of a currency pair is above the strike price when buying calls, or below the strike price when buying puts, a trader can choose to exercise it. This means they can buy or sell the currency for a better price than what is currently available in the underlying market. So, what happens if the trader is neutral against the currency, but expects a short-term change in volatility?

What are currency or forex options?

For forex traders who intend to trade forex options online—for either profit or risk management—having a broker that allows you to trade options alongside traditional positions is valuable. Alternatively, traders can hotforex broker open a separate account and buy options through a different broker. There are two types of options primarily available to retail forex traders for currency options trading. Both kinds of trades involve short-term trades of a currency pair with a focus on the future interest rates of the pair. Derivatives are valued using a pricing model from a variety of market derived parameters. Within the foreign exchange market, perhaps the largest and oldest of these derivative classes are variously known as FX, forex or currency options.

These options trade actively in the Over the Counter or OTC market, as well as on certain futures and stock exchanges. FX options trading is even increasingly becoming available to retail traders via online trading outlets. In addition, currency options can be sold against an existing forex position to provide additional income that increases the position’s breakeven rate. This is analogous to the covered write strategy used by some stock holders.

Currency Option: Definition, Types, Features and When to Exercise

European and American Style currency options have two components to their value. If you think the market is going to rise, you’d buy a call and if you think the market is going to fall, you’d buy a put. With daily options, you’ll take a view on whether you think a market will be above or below a certain level at market close on the same day that you open your trade. It’s the same with weekly, monthly and quarterly options, but expiry will be before a certain weekly, monthly or quarterly date. You can also sell forex put options if you believe the base currency will rise against the quote.

Open and monitor your position

Note that this could result in unlimited losses if the pair doesn’t move in your favour. You can also sell FX call options – if you believe the quote will rise against the base currency. However, this could result in unlimited losses if the pair doesn’t move in your favour.

Unlike futures, where the trader must fulfill the terms of the contract, options traders do not have that obligation at expiration. The best example is the Philadelphia Stock Exchange or PHLX that offers a set of standardized forex option contracts with quarterly delivery dates that deliver into spot, rather than futures contracts. Currency options can also be used to take bets on the degree of movement anticipated in the underlying forex market.

This will allow the correct computation of the premium, which is the amount expressed in either of the option’s currencies that the buyer will need to deliver to the seller in order to purchase this currency option contract. On exchanges like the Chicago IMM, the quoted price might be expressed in U.S. points per currency amount so that the premium for the option will typically be paid in U.S. Besides trading forex options, you can also trade spot forex or FX forwards. Plus, we’re one of the few providers to offer forex trading on Saturday and Sunday with our Weekend GBP/USD, Weekend EUR/USD and Weekend USD/JPY offerings.

In this case, it’s best to buy both a call and a put in order to capture the breakout. IG offers daily, weekly and monthly options, as well as a range of in-platform tools to help you manage your risk. In the chart below, we see an 81.65 support level emerging in the USD/JPY exchange rate in the beginning of March 2011.

When selling options, a trader is hoping that the price of a call option remains below the strike price, and the price of a put option remains above the strike price. Not only can an investor use a simple vanilla call or put for hedging, they can also refer to speculative spread trades when capturing market direction. However you use them, currency options are another versatile tool for forex traders. In addition, currency options contracts typically specify a style for their exercise ability. A currency option (also known as a forex option) is a contract that gives the buyer the right, but not the obligation, to buy or sell a certain currency at a specified exchange rate on or before a specified date. One of the most common reasons for using FX options is for short-term hedges of spot FX or foreign stock market positions.

A relatively recent trading choice that has expanded currency option availability to the retail market has been the advent of online forex option brokers. Remember, forex trading in general is a way to speculate on currencies without taking ownership of the physical assets. You can choose between FX options, spot currency trading or FX forwards . Many individuals prefer trading forex options because it offers limited risk when buying, as they are not obliged to complete the purchase. Options are used by forex currency traders to make a profit or protect against a loss. It is also important to note that there is a wide variety of exotic options that can be used by professional forex traders, but most of these contracts are thinly traded because they are only offered over the counter.