Posts Tagged ‘option trading’

14.12.2011 Post in Trading

keyOptions represent one of six investment instruments of Forex trading. Option is a contract to buy or sell an asset at a specific price within a specific time period. However, the contract gives the right and not the obligation. An option holder is entitled to repudiate the contract if it will bring him no profits. The option’s nature lies in its name which implies “choice” and means that traders have almost absolute freedom in setting contract’s conditions.

There are different types of options: exchange and off-exchange, exotic and common, call and put, and American and European. Forex is well-known to be off-exchange market. Forex options are called currency options.

Call and put options are major types of options. Call options give the right to buy an asset, while put options give the right to sell it. If traders expect the option’s cost basis to rise, they buy the first type of options. If they expect it to fall, they buy the second type.

American option gives its holder the right to buy or sell an asset of a specific volume at a specific price within a specific time period. European option can be only executed at its expiration date.

Although currency options may have rather long life, short-time option contracts are of bigger interest to us. Experts describe option trading as a rapidly developing sector of exchange market. Previously, options had been primarily used by exporting and importing companies to hedge risks, and today they have revealed new opportunities for investors and attracted more traders. However, not all traders fully understand exact principles of option trading and the results it may lead to. Some consider options to be highly profitable with no danger of huge losses while the others think that they are too risky.

Today’s brokers provide traders with various types of options. Experienced investors and specialists have developed multiple strategies for option trading. Undoubtedly, options are a very flexible instrument that can minimize risks and shortly maximize profits provided that it is handled ably. Options are on your side in both low and highly market volatility and bring profits at even a slight price fluctuation.

Beginners in option trading are usually recommended to start with small amounts of money and simple strategies. First, choose a type of options. Then study the theoretical basis and compare trading conditions provided by brokers. And always work out trading process. Developed analytical skills would be an asset as option trading is based on technical and fundamental analyses as well.

Binary options, another type of exotic options, have recently gained popularity among traders. These options are usually called “all or nothing”. It means that a trader will get either known profits or nothing and the debited option value. The only prerequisite for successful binary option trading is to forecast accurately the price direction. Will it rise or fall? Option will win if your choice proves to be correct. Although binary options are quite a clear and simple trading method, thoughtless actions may perceptibly affect your budget. Always remember to plan carefully before act and do not rely on luck.

Added by Roman Tsepelev,
InstaForex development manager