Forex options trading – Is it a profitable investment?

Whenever the topic of ‘Option Trading’ crops up as a topic of conversation, people naturally tend to assume that it is about the stock market. This is not surprising as options trading had been the prerogative of the stock market for many decades prior to the development of the forex market for the retail trader. However, ever since the forex market had become readily accessible to the retail trader, forex options trading have also become immensely popular.

In fact, the forex options market has grown to be the largest option market in the world. The reason for this is obvious. With options, a forex trader is able to leverage his limited capital for more trading opportunities and hence also more profitable scenarios than just trading in currencies alone. In addition to a higher percentage in profits, the forex option trader is also to limit his liability to the amount of premium that he paid for the option.

Forex Options Trading Strategy

For many investors, forex options trading present a great way to increase profit as well as minimize risk to their portfolio. Most market participants involved in hedging (the act of minimizing risk) are corporations which are engaged in import and export and would like to secure future exchange rates. On the other hand, speculators (investors seeking to increase profit) use forex options to profit in both trending and ranging markets.
Forex traders can use two types of options: the single payment option trading (SPOT) and call/put option. The call/put option works a lot like stock option and is more common between the two. On the other hand, SPOT options allow greater flexibility to traders because there are several ways to earn income this way. At present, there are several kinds of SPOT options – standard, the no touch (trader gets the payout if strike price is not reached), one touch (touches one of the set strike prices), double one touch, double no touch and the digital spot (market prices are above or below the strike price).

For this article, we will discuss the two trading strategies which can be used for the traditional call/put options (more commonly known as vanilla options) – the strangle and the straddle strategies.

Forex Options

Forex options is the safest way to protect yourself while trading in the foreign exchange market. Usually when trading Forex you would exchange one currency for another ie. GBP/USD: exchange the British pound for the US dollar.

Trading Forex Options though gives you the right to set the date and price of a forex trade to some point in the future but not the obligation to do so. So if the market goes against you can back out, and all you’ll lose is the premium you paid to the seller/broker.

Example:
I want to buy 100 lots of GBP/USD at 1.4523 this time next week. Meaning I will sell the GBP (put) and buy the USD (call). On the expiry of this agreement ie. this time next week, if the currency quote is lower then the number you gave you would use your option and follow through with your trade, buy the lots for less than 1.4523 , and then sell them into the market again. This difference becomes your profit.