4 Ways to Trade Options, American Style

Forex options trading is one type of transaction done in the world of foreign currency trading. In line with this, several option styles are employed in forex trading. The four option styles are the European option (an option which is exercised only during the expiry date), the American style (an option exercised on any trading day as long as it is before the expiry date), the Barrier option (wherein price of the option must reach trigger level before it can be exercised) and the Bermudan option (option which can only be exercised on a specific date on or before the expiry date).

The American style option makes use of four basic trades described from a spectator’s point-of-view. The four ways to trade options are referred to as long call, long put, short call and short put. In a long call, the investor foresees the forex price to increase and so he buys the right to purchase the option. The operative word here is increase. In the long put, what the trader foresees is that the price of the foreign exchange will decrease thus making him buy the right to sell the option. In both instances, the trader only buys the right to either sell or buy. He may do so at an agreed upon price and expiration date but is not under any obligation to do it. If his forecasts are true, he stands to gain profit. If on the other hand he is mistaken with his predictions, he only loses the premium paid for the right to buy or sell.

On the other hand, a short call is made if it is the trader’s belief that the forex price will decrease and thus may sell the option short or sell or write a call. The investor selling the call is obliged to sell the forex to the buyer at his option. The short put happens when the trader predicts that the price of options will increase and thus will buy it or sell a put. He becomes obliged to purchase the currency from the put buyer at the latter’s option. Again, if the traders in the last two mentioned trades are correct with their forecasts, they will gain profits. Loses in these cases is unlimited, such as the full value of the currency, should the predictions hold false.

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