Forex Trading Platforms 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 Platforms News
forex trading platforms
There he traded on the floor for 14 years, developing invaluable knowledge, experience, and direct relationships with traders of ... including managed funds, futures, forex, options, full-service and discount brokerage, trader education, market ...
Read moreAuthor Profile - Inside Futures
Dr. S. Sivaraman is 1952 born and got his Ph.D in applied statistics in 1979. He served as professor for 28 years under University of Madras, Chennai, India. During 23 yrs of his post doctoral work he developed a statistical algorithm to predict the ...
Read moreAsian Session: Live Market Analysis - FXStreet.com
com on the annual STAR Awards fits with our strategy of recognizing top trading talent in futures and forex who are developing performance track records . SFO magazine is proud to be a sponsor of the 2010 STAR Awards and to help heighten attention on ...
Read moreTraderPlanet.com Announces 2010 STAR Awards Publisher Partnership with ... - YAHOO!
Outside of those momentum-packed times traders will be intra-day trading with tight targets. The U.S. session has little forex momentum, outside of reversing whatever came before. TheLFB Trader Advantage Program is a unique product that services and ...
Read moreThe Trader Advantage: The NFP Trade - ForexTV.com
The euro rose 0.3 percent to 121.36 yen while the dollar was up 0.3 percent at 89.31 yen, recovering from a 3-month low of 88.14 yen hit on trading platform EBS on Thursday. Technical analysts said the bounce from that 88.14 low represented a key-day ...
Read moreFOREX-Euro steady vs dollar; U.S. jobs data awaited - Reuters
Outside of those momentum-packed times traders will be intra-day trading with tight targets. The U.S. session has little forex momentum, outside of reversing whatever came before. TheLFB Trader Advantage Program is a unique product that services and ...
Read moreThe Trader Advantage: Range-Bound Trade About To Break - ForexTV.com
The euro rose 0.3 percent to 121.36 yen while the dollar was up 0.3 percent at 89.31 yen, recovering from a 3-month low of 88.14 yen hit on trading platform EBS the previous day. Traders said the dollar's upside would likely be capped around 89.50 ...
Read moreFOREX-Euro edges up vs dollar; U.S. jobs data awaited - Forex Pros
LONDON, March 5 (Reuters) - The euro edged up against the dollar on Friday in subdued trade ahead of U.S. jobs data, while the yen slipped after a report that the Bank of Japan may consider further monetary easing steps to prop up its economy ...
Read moreFOREX-Euro edges up vs dollar; U.S. jobs data eyed - Reuters
All account types at FOREX Ltd are secure and reliable, while the trading platform for conducting operations is technologically advanced and functionally comprehensive.
Read moreForex Ltd - Forex Pros
Perhaps this is one of those things that everyone knows but us. Apparently the Australian born porn actress called Monica Mayhem was a futures trader in Sydney, and then did forex and commodities in London. We discovered this news this morning when ...
Read moreForex Trading Platforms Links
Award Winning Online Forex Trading Platform | FX TradingFeatures of the dbFX Forex Trading platform. Streaming pricing in 34 currency pairs, real time reporting and Margin Management and risk management tools. |
Forex Trading Platform | Forex Trading Software | dbFXDiscover unique advantages of our Forex Trading Platform. IDeal - Online forex trading and training platform. Forex currency trading services to clients from around the globe |
Forex Trading PlatformForex Trading Platform Reviews is an independent review site helping you make informed decisions about Forex Trading Platforms which are also known as currency trading software or ... |
Find the best Forex Trading Platform|Forex Platforms|Reviews| Forex ...FXGame Practice Platform Practice Forex Trading. It's Free, and Never Times Out. |
Practice Forex Trading with FXGame - OANDA FXTradeWelcome to the eToro forex trading platform, the forex software that revolutionized the forex trading industry by making forex trading easily understandable and the forex market ... |
eToro - Online Forex Trading PlatformBest forex brokers and trading plaforms for all forex traders. Interbank spreads from 0 pips. All trading strategies like news trading, robot trading (expert advisors), day trading ... |
Best forex brokers and trading platformsForex Trading Platforms offered by Forex Club include: Rumus2, IDS, IDS Mobile |
Forex Trading Platform, Forex SoftwareForex Trading Provider, Finotec - Forex Trading Platform that provides instant dealing in currencies, indices, options and CFDs on all major world markets. |
Forex, Forex Trading, Online Forex Trading Platform - Finotec UK ...A Forex trading platform is either a software program or a web-based service that allows you to trade on the Forex market. There are hundreds of these |