Forex Trading Course Article
Forex Options Market Overview
The forex options market started as an over-the-counter (OTC) financial vehicle for large banks, financial institutions and large international corporations to hedge against foreign currency exposure. Like the forex spot market, the forex options market is considered an "interbank" market. However, with the plethora of real-time financial data and forex option trading software available to most investors through the internet, today's forex option market now includes an increasingly large number of individuals and corporations who are speculating and/or hedging foreign currency exposure via telephone or online forex trading platforms.
Forex option trading has emerged as an alternative investment vehicle for many traders and investors. As an investment tool, forex option trading provides both large and small investors with greater flexibility when determining the appropriate forex trading and hedging strategies to implement.
Most forex options trading is conducted via telephone as there are only a few forex brokers offering online forex option trading platforms.
Forex Option Defined - A forex option is a financial currency contract giving the forex option buyer the right, but not the obligation, to purchase or sell a specific forex spot contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the forex option buyer pays to the forex option seller for the forex option contract rights is called the forex option "premium."
The Forex Option Buyer - The buyer, or holder, of a foreign currency option has the choice to either sell the foreign currency option contract prior to expiration, or he or she can choose to hold the foreign currency options contract until expiration and exercise his or her right to take a position in the underlying spot foreign currency. The act of exercising the foreign currency option and taking the subsequent underlying position in the foreign currency spot market is known as "assignment" or being "assigned" a spot position.
The only initial financial obligation of the foreign currency option buyer is to pay the premium to the seller up front when the foreign currency option is initially purchased. Once the premium is paid, the foreign currency option holder has no other financial obligation (no margin is required) until the foreign currency option is either offset or expires.
On the expiration date, the call buyer can exercise his or her right to buy the underlying foreign currency spot position at the foreign currency option's strike price, and a put holder can exercise his or her right to sell the underlying foreign currency spot position at the foreign currency option's strike price. Most foreign currency options are not exercised by the buyer, but instead are offset in the market before expiration.
Foreign currency options expires worthless if, at the time the foreign currency option expires, the strike price is "out-of-the-money." In simplest terms, a foreign currency option is "out-of-the-money" if the underlying foreign currency spot price is lower than a foreign currency call option's strike price, or the underlying foreign currency spot price is higher than a put option's strike price. Once a foreign currency option has expired worthless, the foreign currency option contract itself expires and neither the buyer nor the seller have any further obligation to the other party.
The Forex Option Seller - The foreign currency option seller may also be called the "writer" or "grantor" of a foreign currency option contract. The seller of a foreign currency option is contractually obligated to take the opposite underlying foreign currency spot position if the buyer exercises his right. In return for the premium paid by the buyer, the seller assumes the risk of taking a possible adverse position at a later point in time in the foreign currency spot market.
Initially, the foreign currency option seller collects the premium paid by the foreign currency option buyer (the buyer's funds will immediately be transferred into the seller's foreign currency trading account). The foreign currency option seller must have the funds in his or her account to cover the initial margin requirement. If the markets move in a favorable direction for the seller, the seller will not have to post any more funds for his foreign currency options other than the initial margin requirement. However, if the markets move in an unfavorable direction for the foreign currency options seller, the seller may have to post additional funds to his or her foreign currency trading account to keep the balance in the foreign currency trading account above the maintenance margin requirement.
Just like the buyer, the foreign currency option seller has the choice to either offset (buy back) the foreign currency option contract in the options market prior to expiration, or the seller can choose to hold the foreign currency option contract until expiration. If the foreign currency options seller holds the contract until expiration, one of two scenarios will occur: (1) the seller will take the opposite underlying foreign currency spot position if the buyer exercises the option or (2) the seller will simply let the foreign currency option expire worthless (keeping the entire premium) if the strike price is out-of-the-money.
Please note that "puts" and "calls" are separate foreign currency options contracts and are NOT the opposite side of the same transaction. For every put buyer there is a put seller, and for every call buyer there is a call seller. The foreign currency options buyer pays a premium to the foreign currency options seller in every option transaction.
Forex Call Option - A foreign exchange call option gives the foreign exchange options buyer the right, but not the obligation, to purchase a specific foreign exchange spot contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign exchange option buyer pays to the foreign exchange option seller for the foreign exchange option contract rights is called the option "premium."
Please note that "puts" and "calls" are separate foreign exchange options contracts and are NOT the opposite side of the same transaction. For every foreign exchange put buyer there is a foreign exchange put seller, and for every foreign exchange call buyer there is a foreign exchange call seller. The foreign exchange options buyer pays a premium to the foreign exchange options seller in every option transaction.
The Forex Put Option - A foreign exchange put option gives the foreign exchange options buyer the right, but not the obligation, to sell a specific foreign exchange spot contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign exchange option buyer pays to the foreign exchange option seller for the foreign exchange option contract rights is called the option "premium."
Please note that "puts" and "calls" are separate foreign exchange options contracts and are NOT the opposite side of the same transaction. For every foreign exchange put buyer there is a foreign exchange put seller, and for every foreign exchange call buyer there is a foreign exchange call seller. The foreign exchange options buyer pays a premium to the foreign exchange options seller in every option transaction.
Plain Vanilla Forex Options - Plain vanilla options generally refer to standard put and call option contracts traded through an exchange (however, in the case of forex option trading, plain vanilla options would refer to the standard, generic forex option contracts that are traded through an over-the-counter (OTC) forex options dealer or clearinghouse). In simplest terms, vanilla forex options would be defined as the buying or selling of a standard forex call option contract or a forex put option contract.
Exotic Forex Options - To understand what makes an exotic forex option "exotic," you must first understand what makes a forex option "non-vanilla." Plain vanilla forex options have a definitive expiration structure, payout structure and payout amount. Exotic forex option contracts may have a change in one or all of the above features of a vanilla forex option. It is important to note that exotic options, since they are often tailored to a specific's investor's needs by an exotic forex options broker, are generally not very liquid, if at all.
Intrinsic & Extrinsic Value - The price of an FX option is calculated into two separate parts, the intrinsic value and the extrinsic (time) value.
The intrinsic value of an FX option is defined as the difference between the strike price and the underlying FX spot contract rate (American Style Options) or the FX forward rate (European Style Options). The intrinsic value represents the actual value of the FX option if exercised. Please note that the intrinsic value must be zero (0) or above - if an FX option has no intrinsic value, then the FX option is simply referred to as having no (or zero) intrinsic value (the intrinsic value is never represented as a negative number). An FX option with no intrinsic value is considered "out-of-the-money," an FX option having intrinsic value is considered "in-the-money," and an FX option with a strike price at, or very close to, the underlying FX spot rate is considered "at-the-money."
The extrinsic value of an FX option is commonly referred to as the "time" value and is defined as the value of an FX option beyond the intrinsic value. A number of factors contribute to the calculation of the extrinsic value including, but not limited to, the volatility of the two spot currencies involved, the time left until expiration, the riskless interest rate of both currencies, the spot price of both currencies and the strike price of the FX option. It is important to note that the extrinsic value of FX options erodes as its expiration nears. An FX option with 60 days left to expiration will be worth more than the same FX option that has only 30 days left to expiration. Because there is more time for the underlying FX spot price to possibly move in a favorable direction, FX options sellers demand (and FX options buyers are willing to pay) a larger premium for the extra amount of time.
Volatility - Volatility is considered the most important factor when pricing forex options and it measures movements in the price of the underlying. High volatility increases the probability that the forex option could expire in-the-money and increases the risk to the forex option seller who, in turn, can demand a larger premium. An increase in volatility causes an increase in the price of both call and put options.
Delta - The delta of a forex option is defined as the change in price of a forex option relative to a change in the underlying forex spot rate. A change in a forex option's delta can be influenced by a change in the underlying forex spot rate, a change in volatility, a change in the riskless interest rate of the underlying spot currencies or simply by the passage of time (nearing of the expiration date).
The delta must always be calculated in a range of zero to one (0-1.0). Generally, the delta of a deep out-of-the-money forex option will be closer to zero, the delta of an at-the-money forex option will be near .5 (the probability of exercise is near 50%) and the delta of deep in-the-money forex options will be closer to 1.0. In simplest terms, the closer a forex option's strike price is relative to the underlying spot forex rate, the higher the delta because it is more sensitive to a change in the underlying rate.
About the Author:
John Nobile - Senior Account Executive
CFOS/FX - Online Forex Spot and Options Brokerage
Forex Trading Course News
forex trading course
Reuters) Black Swan Capital Live Event Today Courtesy of Tom Busby’s DTI (Teaching the Art of Trading), Black Swan Capital will be presenting a live webinar today. We will be revisiting the reasons why we think the dollar multi-year bull market is ...
Read morePOUND POUNDED, EURO FADING, AND READER MAIL - ForexTV.com
... ranging in a narrow area between $78.70-$78.90 Oil price hit $80 a barrel on Friday 26 Feb after the price gravitated wildly in opposite directions during the course of each trading day last week ... The Forex Market” All Rights Reserved.
Read moreOil approaches $79.00 a barrel - FXStreet.com
com (Barcelona) - The Japanese Nikkei 225 index seems to have reversed its course after ... the first hours of trading. Currently is down to 2,775.00 points from an intra-day high of 2,785.00 points. © 2010 “FXstreet.com. The Forex Market” All ...
Read moreNikkei 225 reverses to the downside; the Hang Seng edges down - FXStreet.com
The recent break of trend line resistance may signal that more gains are ahead, as a forming triangle warns of a potential breakout ... com DailyFX provides forex news on the economic reports and political events that influence the currency market.
Read moreEuro Shows Signs Of Diverging From Equity Markets - Yahoo Finance
The Swiss Franc has become the stand out amongst European currencies as the Euro is plagued by Greece’s troubles and its implication for the other European Union members, while sterling remains under assault with the prospect of additional QE. A ...
Read moreGBP/CHF Range Holding Despite Pressure - Yahoo Finance
He runs one of the longest-standing, most accessible daily newsletters for the retail forex investor (you can see his ... Instead, the Fed waited for the “primary dealers,” or the big institution brokers to buy them. Then the Fed buys those ...
Read moreCatching on just in Time? - Sovereign Society
NewswireToday - /newswire/ - New York, NY, United States, 03/01/2010 - Join FXCM at the Rio in Las Vegas, May 3–4, 2010, for a two-day Forex Trading Extravaganza . FXCM is hosting a forex trading expo in Las Vegas on May 3–4, 2010. This two-day ...
Read moreForex Capital Markets, LLC to Host Forex Trading Expo in Las Vegas - Newswiretoday.com
FXCM (www.fxcm.com) is hosting a forex trading expo in Las Vegas on May 3–4, 2010. This two-day conference includes dozens of educational courses for all levels of trader experience. Central to the expo experience is a course track designed ...
Read moreSave the Date: Forex Trading Expo in Las Vegas, Hosted by FXCM - PR Inside
But Jane Foley at Forex.com said that while the avoidance of a Greek default ... Analysts said the prospect of such a result heightened concerns over the UK’s record budget deficit as traders reasoned that it lessened the likelihood that the UK ...
Read moreEuro nears nine-month low against dollar - Financial Times
Phil’s market commentary, fundamental and technical analysis, and long-term forecasts are sought ... diversified products including managed funds, futures, forex, options, full-service and discount brokerage, trader education, market research, and ...
Read moreForex Trading Course Links
The Forex Trading Course for Currency Trading StrategiesInformative, straight-to-the-point reviews on the top Forex Trading courses.The Best selling courses of 2007.. Forexmentor ,Forex Trading Machine , Online Trading Academy , Traders ... |
Best Forex Trading Course :: Ratings & ReviewsCurrently there is quite a bit of information out there claiming to teach you how to make money in the Forex market, and lets be honest, most of it is pure |
Forex Trading Course | Forex Strategy | ForexStrategySecrets.comEnlightening reviews and information on the best Forex trading courses, currency exchange brokers, and unbeatable Forex strategies to trade successfully in 2010. |
Forex Trading Courses - Top Forex Systems & ReviewsForex trading is one of the few ways to build wealth quickly; everything about ... "Thanks for your course and daily newsletters. Made $7,552 in my first month trading ... |
Learncurrencytradingonline.comFree online Forex training course Webinar. Guaranteed ThinSlice Trading strategies - no software, and no gimmicks - just proven, rock-solid Forex training that will improve your ... |
Forex Training Course - Learn Forex Trading Online | Forex Day Trading ...They are just not using our very powerful trading strategies and filters. What's the Difference in our Forex Trading Course Compared to Others? |
Simple Forex - Simple ForexForex trading, also known as FX or currency trading, gives you access to the largest market in the world with over $2 trillion in daily transactions. |
Forex Trading CoursesCall your local center and speak with an Education Counselor that can assist you. Choose your center: |
Forex Trader CourseAre you brand new to FX trading? Have you traded before but are looking to move to the next level? No matter what kind of experience you have, there’s an FXEDU trading course ... |