Tuesday, October 26, 2010

Forex Options Trading

Initially, forex options trading are accessible for big banks, financial institutions and large corporations to leverage again the currency exposure. However with the new technology of able to create real-time quotes for the market, options trading are more readily available to individuals and corporations worldwide. Trades can be done through phone calls or online trading platforms.
Forex options trading provide flexibility of trading to many small or large investors. The ability to flexibly hedge funds is a very good advantage that the investors can used in the forex trading ground. As most options trading provide trading through phone calls, only a few of them provide online option trading alternatives.
Option buyer will have to pay the premium seller an up front amount when the current option is initially purchased. Once paid, there are not more financial obligation for the option holder until that very currency is either offset or expires. The foreign currency seller will initially collects the premium paid from the option buyer. Then they will see if the market will move in a favorable direction. If the market moves in a favorable trend, the seller will not have to pay anymore funds for the options other than the initial margin requirement. But if the trend is moving against the favor of the seller, the seller will have to pay for the offset to balance for the lost in the market.
Just like the buyer, the option seller has the alternative to buy back the foreign currency option contract upon expiration or choose to hold the option contract until the expiration date.
Volatility of the market is considered the most important focus to forex pricing. High volatile of the market can increase the chance of the option expiration in the money. This could result that the option seller paying for more to balance the lost in the market.
The different in price changed of a forex option against the forex spot rate is defined as delta. Delta is also an important factor to consider on the forex options trading. Change in forex spot rate plus change in volatility can affect the delta rate. The delta ranges from zero to one. An out of money forex option will have a delta value closer to zero where the forex option with deep in the money options will have a value closer to one.

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1 comment:

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