currency option

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What are the Factors that Affect Forex Option Values?

March 27, 2009 in Forex | No comments

The prices of forex options vary depending on several factors. A single or a collective effect may determine the value of options. The first factor is what traders call the intrinsic value. It is the difference between the strike price and the underlying contract rate of the forex spot. This is the actual value of the option once exercised by the trader. It must be zero or above zero, never a negative numeral. A currency option with no intrinsic value is called “out of the money”, an option with value is called “in the money” and a forex option that has a strike price that is the same or very close to the rate of the underlying forex spot is called “at the money”.

The next factor affecting option prices is the time value, also called the extrinsic value. This is the uncertainty of price over time. It is generally considered that the longer the time, the higher the premium.

Another factor affecting value is the interest rate differential. This is basically the change in the interest rate that affects the relationship between the current market rate and the option strike price, which is commonly factored into the premium as a time value function.

The final factor is volatility. Most traders consider this to be the most important determinant of the price of options. It also measures movements of the underlying price. Greater volatility increases the possibility of the market value hitting the strike value within the limited period of time. It is typical that currencies that has greater volatility command higher premiums.

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

What are the Pros and Cons in Trading Forex Options

March 25, 2009 in Forex | 2 comments

More and more traders are choosing to trade forex options. This is because they manage to weigh the pros and cons and they find that the former far outweighs the latter. Currency options is an agreement or a contract between the option buyer and the option seller that gives the buyer the right, with no underlying obligation, to buy or sell an option. It is the buyer that dictates the strike price and the expiry date of the option. If the expiration date comes, the buyer may choose to exercise his option and buy the currency or he may opt to just let the option expire worthless. All he needs to pay for is the premium. Given this definition, forex option trading indeed poses many advantages over some of the financial instruments used in various exchanges. Some of the said advantages are the limited risk involve in this transaction, the unlimited potential for earnings, the low up-front cash requirement, the flexibility feature provided to the trader, the possibility to use the option as a hedge over other positions to limit risk and the provision of many choices for SPOT options.

Just as there are pros, there are also a few cons in currency option trading. The premium assigned to an option may vary according to the option’s date and strike price making the reward as well as the risk ratio also vary. Once the trader purchases a SPOT option, he may not change his mind to sell it. Predicting the scenario for a good time and date for the option may not be an easy task. Lastly, option trading is sometimes taken as going against the odds. Other than these, nothing bad can be said about currency option transactions.

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

Here’s How the Forex Option Affects the Buyer

March 16, 2009 in Forex | 3 comments

In a currency option, also popularly known as forex option, 2 parties come in an agreement dealing with currency. The 2 parties involved are the seller, usually a large bank or a financial or economic institution, and the buyer, usually traders and investors. The agreement aims to lessen the risk taken by the buyer and hedge in unfavorable currency movement. In this contract, the buyer gains the right but no the duty to buy currency at a set price and a limited time in exchange for paying the seller a premium.

This works mostly in the favor of the buyer because the risk involved is nothing but the premium paid. So no matter how low the currency value plummets or how high it ascends the only obligation of the buyer is the premium paid upfront. This means there is low risk and unlimited profit probability.

If the value of currency goes lower than the original price agreed upon, the buyer can choose to ride out the contract until it expires without buying any currency. This would limit loss to the premium paid.

Now the currency value can also go up, more than the original price agreed on. In this case the trend goes in favor of the buyer. The buyer can choose to sell the contract back to the seller at an agreed price for instant profit. He may also choose to exercise the right and buy the currency at the agreed price then sell it at the current price.

These are the prospects the buyer can look forward to when using forex option as an investment tool.

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