If you want to start trading in forex options, you also need to weigh your options, so to speak. There are two main types of option contracts available to forex traders: traditional and single payment option trading or SPOT. Let’s examine the two types in some detail and look at their advantages and disadvantages:
In the traditional forex option contract, the trader has the right to buy or sell a certain amount of currency, at a given price and within a certain period of time, but is not obliged to do so. To secure the option contract, the trader has to pay the broker a one-time fee or a premium.
There are two types of traditional forex options contracts, American and European, which differ in when you can exercise your option. In the American type, you can exercise at any time up until the expiration date of the option; in the European type, you can exercise the option only at the expiration date.
With a SPOT contact, you select a scenario, pay the quoted premium and make a profit if the scenario you selected takes place. For example, you believe that the Japanese yen will exceed 93.2000 against the US dollar in one week. If that happens then your profit is automatically credited into your trading account.
So what are the pros and cons of both types of forex options contracts? In terms of premiums, SPOT options cost more than the traditional contracts, increasing your risk. In terms of difficulty of execution, traditional options are more difficult to execute, unlike SPOT wherein you automatically receive a payout when your trade is successful. Understanding fully the pros and cons will enable you to select which option contract to trade for maximum profit.
Timothy Stevens is a Forex Options Trader who owns http://www.NonDirectionTrading.com – He has helped hundreds of people on Trading Forex with Options.
He has recently developed a free e-course showing you a step by step process for starting your Forex Trading easier. To learn how to start Forex Trading with Options without wasting your time and losing more money, visit http://www.NonDirectionTrading.com/members/FreeReport.htm
