Currency Options Trading - What are Your Options

Currency Options Trading: What are Your Options? Many investors and traders often avoid trading stocks and other asset classes with the fear of incurring losses stemming from global economic fluctuations and inflation. However, if there has been one trading strategy that works as a hedge against these very turbulences, it is currency trading. Trading currency pairs can indeed help individuals and institutions to protect themselves during economic and other crises. There are several ways in which one may engage in forex trading, options being an important one. Currency options provide an investor with the flexibility to choose whether or not to trade a certain currency pair at a given time, while also having it as one of the possibilities. This makes currency options a suitable choice even for individuals and companies deciding to take this path for the first time. There are 2 common ways of investing in currency options. Here’s a look: 1. Call & Put Options Trading One of the most basic ways to trade currencies is through call and put options. Here’s a glimpse at what these two strategies entail: i) Call Option  Here, the trader first carries out a thorough analysis of the possible global economic trends.  If the trader predicts the rise in value of a certain currency in relation to the currency of his/her own country, then s/he shortlists the currency pair in which the foreign currency in question is the base currency (appearing first in the pair).  Finally, the trader agrees to buy this currency pair at a specific exchange rate at a pre-determined point in time.  Just like in any other options trading strategy, the individual engaging in the call option trade has the right but not the obligation to buy the currency pair. This helps him/her to review the economic conditions prevalent during the time and minimize losses by making the trading decision based on this evaluation.

ii) Put Option  Contrary to a call option, a put option is a currency trading strategy that provides the trader the right but not the obligation to sell a currency pair at a specific exchange rate and a pre-determined point in time.  Here, if the trader perceives one’s own currency value to appreciate in comparison to a foreign currency, s/he may determine the specific period when this appreciation is likely to happen and agree to sell the currency pair at this time.  To be able to sell a foreign currency in exchange for one’s own country’s currency, s/he may first buy the foreign currency and then choose to sell it again in exchange for one’s own currency at the pre- decided time when the appreciation is predicted to occur. While both futures and options contracts allow one to derive profits from currency exchanges, options contracts are more flexible and less risky in that they do not bind the trader into performing the trade at the stipulated time. 2. Single Payment Options Trading (SPOT)  Another lucrative means of engaging in currency options trading is the Single Payment Options Trading or SPOT strategy. Here, the trader determines and states the likelihood of a certain condition being fulfilled at a specific point of time in the future. For example, the trader may have a reason to believe and state that the USD/INR currency pair is likely to elevate to a specific exchange rate figure in the next two weeks.  For this condition, the trader coordinates with a share broker or stock brokerage firm, and a certain premium amount is finalized.  If this condition is fulfilled after the number of days stated by the trader in the agreement, the trader receives the premium amount finalized earlier. However, if this condition is not met at the stated point in time, s/he does not receive the amount and the premium is paid to the share broker.  The SPOT strategy requires a trader to carry out a considerable amount of research and analysis to logically conclude that the phenomenon is likely to occur in the near future. However, if s/he is able to accurately predict the occurrence of the scenario, one can earn significant profits through this trading technique.

Conclusion Incorporating forex options as part of one’s trading strategies and investment plans can indeed be a good decision on the part of an individual or institution. The key here is to understand the tricks of the trade as well as to analyse the economic conditions and arrive at a logical conclusion about the performances of currency pairs. We would be happy to help you kickstart your journey into forex options trading.