Home Analysis Forex Options: What are they for?

Forex Options: What are they for?

by Danijel

Forex Options: What are they for?

Like all other Forex derivatives, options are primarily used for two basic purposes: one is gaining profits through speculation, and the other is risk management. A delayed trade may be a means to an end, but it certainly cannot be all there is to it. Forwards and futures are essentially delayed trades and swaps do have a practical side of their own, but options are the middle ground of sorts as well as the way to go, according to most traders.

Making money using Forex options

If Forex is about making bets on the value of a currency pair, there is a serious possibility of loss when the market goes the other way. Forex options can enable you to profit even from market events which would otherwise be adverse, with minimum investment and risk, but we’ll get to that. However, there is another side to this coin, one that gave it quite a bad name as time went by. Speculation is risky business, and doing so via Forex options will increase the price of doing business to some extent. Not only do you have to be right on the money when it comes to your predictions, but you also have to take into account the price of an option as well. In order for a Forex option to make it worth your while, the profit has to cover all the expenses, including the premium you paid for the options, and this can prove tricky at times. The price movement needs to be big enough to cover it, otherwise you lose the premium. However, if the price of an option rises in the meantime, you could just sell it and pocket the difference; it won’t make you as much money as you intended, but at least you won’t have to worry about them anymore, and you will be making money after all. What makes Forex options so profitable compared to other options is the unbelievable amount of leverage that Forex markets provide, enabling you to make huge profits on the smallest price shifts, if you play your cards right.

Risk management

When it comes to limiting losses, few financial tools can match options; the only risk is the premium, which is a fraction of the cost of the underlying instrument. Every Forex trader needs to be prepared for the worst case scenario. Futures and forwards are not the best ways to do this, because of their binding nature. If you get one of those and the market moves against you, you’re stuck between a rock and a hard place: either going through with an unfavorable deal or backing out and facing potential repercussions in terms of penalties and damage to your reputation. Forex options offer a way around these restrictions, enabling you to cut your losses and move on, while risking a mere fraction of the deal’s value and nothing else. Making money while limiting exposure is what separates true Forex traders from the rest.

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