The Basic Concept Of Forex Options Trading For Beginner
The Bank for International Settlements reported that, until April 2010, foreign exchange market has average daily turnover approximately $4 trillion. The number is derived from several types of foreign exchange transactions including forex options trading. The options trading and other type of forex transactions are only around $200 billion. Hence we can see that forex options trading is not as popular as forex spot or cash trading.
Anyway, to give yourself better understanding and more knowledge on foreign exchange market, it will be useful for you to know about forex options trading. You want to be a professional trader or investor, don’t you? Then, take your time to learn about forex options trading. Probably in the future you can take any opportunity in options as it indeed presents you a good possibility to make more money from foreign exchange market.
Option is a derivative product or instrument in financial market. Option provides a contract, called option contract, between two sides regarding the buying or selling of a particular asset at a certain price and for the specific period of time. Within this specific period, the buyer has a right, but not an obligation, to buy the asset and the seller receives an obligation to sell the asset to the buyer. For detail, the right to buy an asset is called call and the right to sell an asset is called put. You’ll often hear these terms when you conduct forex options trading. So don’t get them wrong with buy and sell in forex spot trading.
However, in forex options trading, you don’t buy the actual underlying currency as you buy a currency in forex cash market. You only have to spend a certain amount of money to buy a currency with certain premium price. Therefore, when you suffer a loss the only amount you have to pay for the seller is only that premium price.
You can discover similar trading mechanism not only in financial market but also in other sectors. For instance when Mr. X buys all-risk insurance for his house at certain premium price, let’s say he buys it for $1000 for 5 years insurance coverage. The value of his house is $50000 and then after 5 years there is nothing happen to his house. So Mr. X only losses $1000, it’s much better than if something bad happens to his house, he has to loss almost all of the value of his house. Now you can see, with forex options trading you can have a limited risk with great profit potential.