Dynamic Volatility Trading Strategies in the Currency Option Market

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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 forex exchange option trading strategies 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 are 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 case it is simply a forex exchange option trading strategies or a put.

These offer forex exchange option trading strategies 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 FX 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 forex exchange option trading strategies puts or sell calls.

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How are FX options traded? Access to FX options FX option contracts are typically traded through 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 forex exchange option trading strategies products, trading tools and features.

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Cyprus, Japan and South Africa already have some form of regulation in place for binary options, but more needs to be done. This means that they derive their value from that of an underlying investments price-commonly a stock, commodity, or currency in the global capital markets. They are essentially a contract where the holder buys the right to purchase or dispose of the underlying asset at a predetermined price (referred to as the strike price) over the life of the option-it will typically range up to a year from the contract issuance date depending on the asset.