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Forex Option Trading Alternative |
Forex Option Trading Alternative
Forex option trading is an investment tool that provides
investors with flexibility establishing forex trading and hedging
strategies.
The foreign exchange (FX or Forex) market is the largest, most liquid
market in the world working round the clock (due to the overlapping of
different time zones), 5 days a week, including all of the currencies
in the world and having average traded value of around U.S. $1,900 bln
per day.
Forex option trading started as an over-the-counter (OTC) hedging
instrument for large financial institutions. Today, thanks to the vast
variety of real-time financial data on the Internet and widely
available programs, forex option trading is open for every individual,
firm and/or country whether speculating or hedging in foreign currency
markets.
The buyer in the forex option trading market is called the holder of a
foreign currency option. The only primary financial obligation of the
holder in forex option trading is to pay the premium to the seller in
advance when purchasing the foreign currency option. Once it is done,
no other obligations exist for the forex option buyer. In case forex
option is exercised, the holder is said to be assigned a spot position.
However, most options in forex option trading are not exercised by the
buyer, but are offset in the market before the expiration date. If by
that time the strike price is out-of-the-money, forex option expires
worthless.
The seller in forex option trading is also called the granter, or
writer, as in Stock Option Trading. The seller must have the funds in
her account that would cover the initial margin requirement and put
some extra money there should the market move in unfavourable
direction. Much like the buyer, the forex seller can either buy back
the contract in forex option trading before it expires, or hold it
until expiration.
One of the most important factors influencing price formation in forex
option trading is volatility. An increase in volatility results in
growth of both call and put options prices.
Standard put and call option contracts are called plain vanilla forex
options and customized forex options are known as exotic ones. The
latter are usually not very liquid.
Thus, forex option trading is yet another challenging way to make
profit.
If you still have questions about option trading that are left without
answer, you may find what you're looking for in the articles Option Trading Tools
and Successful
Option Trading.
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