{"id":8063,"date":"2022-09-06T08:54:00","date_gmt":"2022-09-06T08:54:00","guid":{"rendered":"https:\/\/www.vtmarkets.com\/?p=8063"},"modified":"2022-09-06T08:54:00","modified_gmt":"2022-09-06T08:54:00","slug":"fx-options","status":"publish","type":"post","link":"https:\/\/www.vtmarkets.net\/pl\/learn-forex\/fx-options\/","title":{"rendered":"FX options"},"content":{"rendered":"\n
Understanding forex options: <\/strong>options explained<\/strong><\/h5>\n\n\n\n

A forex option is a derivative \u2014 in other words, its value is derived according to data taken from the forex market, including the real-time currency exchange rates and the forecasted changes. When traders use FX options derivatives, they are entering into a contract that enables them to buy a currency at a predetermined rate and at a pre-agreed date in the future. Because these derivatives deal in currencies on the foreign exchange market, they are sometimes referred to as currency options.<\/p>\n\n\n\n

There is no obligation to complete the transaction once the contract reaches its date of maturity. Instead, traders have the option to complete the transaction if they so wish and if the transaction remains in line with their strategy. This gives the option derivative its name. <\/p>\n\n\n\n

If the trader decides they do not want to go through with the transaction, they would only lose the amount they paid to purchase the derivative \u2014 which is known as the FX option premium. While this limits the amount of risk the trader is exposed to, it should be noted that the cost of an option’s premium can be high, and so trading should be approached with caution and with a foundation of research.<\/p>\n\n\n\n

When traders open FX option contracts, they are able to customise the agreement. This is because options are not standardised and sold via the exchange but are instead traded on an over-the-counter (OTC) basis through brokers. Traders can choose the contract duration and exchange price based on their own needs, as well as on the current spot trading<\/a> currency value \u2014 the exchange price will be fixed for the full term of the contract.<\/p>\n\n\n\n

FX options<\/strong> and pips<\/strong><\/h5>\n\n\n\n

While the exchange rate is fixed for the duration of the contract, the real exchange rate will be subject to fluctuations. This is how traders decide whether or not to execute the trade once the contract reaches the point of maturity. Traders will examine these rate changes as they learn how to trade forex<\/a>.<\/p>\n\n\n\n

For example, if the exchange rate remains the same, the trader will lose only the cost of their premium. If the exchange rate falls, the trader will lose more money if they decide to execute the transaction, and so they may decide to turn down the option and lose only the premium cost. <\/p>\n\n\n\n

If the exchange rate rises, beyond the set rate and exceeds the premium cost, the trader will have made a profit. If the exchange rate rises but does not cover the premium cost, the trader has made a small loss. Some traders may decide to execute the transaction even at a loss if they expect the rate to rise again in the future \u2014 this requires careful forecasting.<\/p>\n\n\n\n

But how are these rate movements measured? Rate movements are measured using pips in FX<\/a>, and traders will need to be aware of these pip fluctuations while they trade. A single pip is a movement at the fourth decimal place of a currency value in most cases, and at the second decimal place to quote currencies of smaller denominations, such as the Japanese yen.<\/p>\n\n\n\n

The differences between <\/strong>forex options<\/strong> and other derivatives<\/strong><\/h5>\n\n\n\n

Other than the currency option, there are other derivatives available, and traders will need to familiarise themselves with the differences as they learn forex<\/a> trading techniques.<\/p>\n\n\n\n