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Forex Trading - Online Foreign Exchange
What are Options and How to Trade them
Options are basically a trading premium that lets you have access to more features or "options" in a specific stock or currency exchange in forex. You would also have to pay a certain price to use the options feature. The most valuable tool in options is being given the right or contract to purchase a certain amount of shares or currency at a specific time in the future and being able to hold them for only a certain amount of time.
This is an advantage because usually only a company's employees get options for trading stocks. This is special because employees also can buy shares cheaper than normal people and this is because of stock options. Easy forex will let you have currency options for exchanging currency, but you must pay for these. So you will have the right to call or put currency. This means you can buy or sell a specific amount of foreign currency with that option.
You must pay a premium in order to keep an option until it expires. You also have the right to sell it at any time before the option matures on the maturity date. We will demonstrate how to set up an options trade with easy forex. As always, you are never sure how a foreign currency rate is going to change, but you do would want to be sure what the currency rate would be 30 days into the future. With easy forex, you may choose any amount of time up to six months.
Finding a type of Currency Exchange with Options
The first thing to do in this tutorial is select what type of foreign currency you would like to have options for in the exchange. In this example, we will choose an options trade. We will be using the USD and the EUR. First we'll buy or call $10000 and will be selling or put in Euros over a set period of 30 days. The strike is the locked in rate in options that you determine and we'll say that it is 1.07 US dollars per Euro.
Setting up an Options Trading Maturity Date
The next step is selecting any day within a 6 month rate as your maturity date or expiration date for the trade. This is the date that your options will mature. You may have to ask yourself how much time would you like before choosing to sell. On the easy forex, we will select the expiry date as shown below and choose when you would like to have your options mature on the calendar date. This date should be a business day. For this tutorial, we will choose that maturity date to be 30 days. Since this page is showing an example from a few years ago, you will be choosing a maturity date 30 days from the current day.
Choosing a Strike in an Options Deal
After you have chosen a maturity date, you will now select a strike rate, or the rate you want to have your currency exchange at. For this example, you will want to ensure an options strike rate of 1.07 for this trade. The diagram below is self-explanatory.
Defining the Call and Put of an Option
You may be asking what call and put mean. These are terminologies when doing options trading. Calling is basically the same as buying and putting means selling. In this next step, you will choose a call and put price for your options. In the "amount" box, you will choose what value you want to call in USD. The put or sell will be in Euros, which you have already selected as your selling currency exchange. We will enter 10000 as the amount to call.
Choosing and Calculating an Options Premium Value
A premium is the price you will be paying for the right to having options. This is usually the case with all options deals and Easy Forex is a great place to get foreign exchange currency options where most brokers can't operate on the exchange market. In this step, we will calculate a premium, which is required for the trade. Once you have pressed the calculate premium button, a value will automatically appear and a percentage of the entire trade volume as well. In this example, the premium value is $120. You may choose your premium by selecting different options requirements from the previous steps of this demonstration. After you have a premium selected, it will be locked in for 20 seconds.
Once you have accepted a premium, easy forex will let you know the order status on the next screen. Forex will let you know that the funds used in this trade will be taken from your accounts. Otherwise, if you don't have enough funds, you will be notified that backup funds will be taken from your alternative payment method such as a credit card or paypal. This is very handy if you are only a few dollars short and you don't want to start your options trade all over again to fit into the budget, especially if you have a great rate or premium already locked in with easy forex.
Making money from Options Currency Trade
Here is the moment you have been waiting for. Let's see some examples of how money is made with a currency options deal. You started by having an exchange rate of 1.07 with a maturity date on that option for 30 days into the future. This will be the same for the next 30 days. With the benefits of the options, you are now 100% sure that this is going to be the case, and for this assurance, you are paying the $120 premium. This is the most it can cost to have this assurance and this is what makes options so great.
After having this advantage, your options end after you have completed the trade at the given rate before the maturity date, which is called the open period, or when the option expires. Let's see an example of keeping the option until it matures. If the EUR/USD exchange rate or spot rate as it is sometimes called ends up being 1.04, then you would make money. You would earn 270 Euros of profit. The NET profit though is 150 Euros because you need to also deduct the premium that was paid - So 270 minus 120 would leave a net profit on your forex option of 150 Euros.
Instead, let's say the spot rate is now higher than your ensured rate at maturity. If the rate ends up at 1.10, which is higher than the 1.07 strike rate, you will only lose your premium and not a cent more. This is simiarly like a stop loss and is a great benefit of forex options because it limits your loses. Another advantage tip of options is if you selected a longer maturity date, the rate can change greatly during that time, meaning you can potentially make alot more, but if you lose, you can only lose your premium.
Now we will do an example of selling your option before maturity. If you sell before our 30 day maturity, you will earn the amount that will directly represent the difference between the spot rate or the rate you sell at, and your selected strike rate and also the time left before the option matures.
This wraps up our forex live tutorial on options. If you would like a more in-depth guide, or would like to view more options, you can either read our free online book on forex options or visit the Easy Forex website. You can also sign up and join forex here as well and start trading with as little as $50 deposit with a credit card or even paypal. Easy Forex also offers as many free forex training sessions as you would like with practice money if you would like to experiment with options or any other topics. This is also the place to invest with real money as well. Click Here to visit Easy Forex.