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An FX option foreign exchange option or currency option is a financial derivative that gives the right, but not the obligation, to buy or sell a currency pair at a set price called the strike price on a specified date called the expiry date. FX options are, for the most part, fundamentally driven by the same factors that drive the underlying currency pairs, such as interest rates, inflation expectations, geopolitics and macroeconomic data such as unemployment, GDP, consumer and business confidence surveys.

There currency option trading strategies two styles of options; European and American. The European-style option can only be exercised on the expiry date. The American-style option can be exercised at the strike price, any time before the expiry date. FX option traders can use the 'Greeks' Delta, Gamma, Theta, Rhio and Vega to judge the risks and rewards of the options price, in the same way as you would equity options.

The risk for an option buyer is limited to the cost of buying the option, called the 'premium'. An option buyer has theoretically unlimited profit potential. Conversely, for an option seller the risk is potentially unlimited, but the profit is fixed at the premium received. FX option contracts are typically traded through the over-the-counter OTC market so are fully customisable and can expire at any time. In the spot options market, when you buy a 'call', you also buy a 'put' simultaneously.

FX options are also available through regulated exchanges which are options on FX futures, in which currency option trading strategies it is simply a call or a put. These offer a multitude of expirations and quoting options with standardised maturities. When traded on an exchange, FX options are typically available in ten currency pairs, all involving the US dollar, and are cash settled in dollars. One of the most common reasons for using FX options is for short-term hedges of spot FX or foreign stock market positions.

There are many bullish, bearish and even neutral strategies that can be implemented with options contracts. Spread strategies that are used in equity options can also be used with FX options, including vertical spreads, straddles, condors and butterflies.

An Currency option trading strategies option can either be bought or sold. If you are bullish on the base currency then you should buy calls or sell puts, conversely if you are bearish you should buy puts or sell calls. This website uses cookies. By continuing to use this website you agree to this.

Digital trading examples Digital trading strategy What is digital trading? Learn forex trading Forex trading examples Forex technical indicators Using currency option trading strategies in forex trading Benefits of forex trading What is forex? How currency option trading strategies I fund my account? How do I place a trade? Do you offer a demo account? How can Currency option trading strategies switch accounts? Create an account Trade over 9. Open a demo CFD account. How are FX options traded?

Access to FX options FX option contracts are typically traded currency option trading strategies the over-the-counter OTC market so are fully customisable and can expire at any time. Why trade FX options? Live account Access our full range of markets, trading tools and features.

Open a live account Losses can exceed your deposits. Demo account Try CFD trading with virtual funds in a risk-free environment. Open a demo account. Sign up for free. Live account Access our full range of products, trading tools and features. CFD trading can result in losses that exceed currency option trading strategies deposits. Ensure you understand the risks.

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Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates.

The three main classes of spreads are the horizontal spread, the vertical spread and the diagonal spread. They are grouped by the relationships between the strike price and expiration dates of the options involved. Vertical spreads , or money spreads, are spreads involving options of the same underlying security, same expiration month, but at different strike prices. Horizontal, calendar spreads , or time spreads are created using options of the same underlying security, same strike prices but with different expiration dates.

Diagonal spreads are constructed using options of the same underlying security but different strike prices and expiration dates. They are called diagonal spreads because they are a combination of vertical and horizontal spreads. Any spread that is constructed using calls can be referred to as a call spread, while a put spread is constructed using put options.

If a spread is designed to profit from a rise in the price of the underlying security, it is a bull spread. A bear spread is a spread where favorable outcome is obtained when the price of the underlying security goes down. If the premiums of the options sold is higher than the premiums of the options purchased, then a net credit is received when entering the spread.

If the opposite is true, then a debit is taken. Spreads that are entered on a debit are known as debit spreads while those entered on a credit are known as credit spreads. There are also spreads in which unequal number of options are simultaneously purchased and written.

When more options are written than purchased, it is a ratio spread. When more options are purchased than written, it is a backspread. Many options strategies are built around spreads and combinations of spreads.

For example, a bull put spread is basically a bull spread that is also a credit spread while the iron butterfly can be broken down into a combination of a bull put spread and a bear call spread. A box spread consists of a bull call spread and a bear put spread.

The calls and puts have the same expiration date. The resulting portfolio is delta neutral. For example, a January box consists of:. A box spread position has a constant payoff at exercise equal to the difference in strike values.

Thus, the box example above is worth 10 at exercise. For this reason, a box is sometimes considered a "pure interest rate play" because buying one basically constitutes lending some money to the counterparty until exercise. The net volatility of an option spread trade is the volatility level such that the theoretical value of the spread trade is equal to the spread's market price. In practice, it can be considered the implied volatility of the option spread.

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