currency options

You are currently browsing articles tagged currency options.

What is the Definition of Call Options and Put Options in Forex?

March 20, 2009 in Forex | No comments

Both the foreign exchange call options and forex put options deal with currency options.

Forex call options and forex pull options basically works or operate on the same principle wherein the forex option buyer is given the right but has no responsibility to buy a certain underlying forex spot at a precise strike price before the option expires or on the expiration date itself. The amount paid by the foreign options purchaser to the foreign exchange options seller is what is known as premium. However, it should be noted that the contracts existing in a put option and call option are different and independent of each other and not opposite contracts in the same foreign exchange transaction.

There is forex put seller for every forex put buyer and the same is true with call options – there is a forex call option seller for each forex call purchaser; and both buyers pay an amount – the premium- to their sellers whenever a foreign exchange transaction occurs.

There are two possible circumstances that will happen if the forex options seller decides to hold onto the contract until the day of expiration:

1. The spot position that the seller will take will be the opposite underlying forex currency option spot position if the buyer choose to implement the option.

2. The seller can just keep the whole amount of the premium and just let the forex currency option expire worthless if the price is OTM strike price.

In all transactions, the bottom line is, the outcome of the transaction depends on the positions taken by the buyer and the seller.

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 Important Factors Involved in Pricing Options?

March 13, 2009 in Forex | No comments

Forex Options trading is a type of transaction done within the foreign exchange market. It has become a popular investment vehicle among investors and traders due to its attractive features. Not only does it offer great flexibility with determining strategies to implement, it also poses smaller risks to the trader. If an investor deals with currency options, he stands to lose only small amounts in premiums. Premiums are the cost paid by the trader when he buys an option. Buying an option simply means the trader gets the right to buy at a specific date on an agreed price with no obligation on his part to effect the transaction if it goes against his better interest. He does the buying of option when he sees a currency scenario and deals that scenario with the option seller. If the forecasted scenario happens, then the trader stands to gain profits from the transaction. If not, then he stands to lose a small amount, that of the price of the premium.

In forex option trading, certain factors are vital in pricing the options. Volatility is thought to be the number one factor in determining option values. The higher the volatility of the forex option, the higher the possibility of the market to hit the strike price at a certain time period. Generally, currencies with higher volatility commands higher option premiums. The other factors that determine the forex option values are the time value, the interest rate differential and the intrinsic value. Intrinsic value speaks of the option value if it is exercised at that precise moment. The 3 ways to describe the relationship between current price and strike price are “in the money”, “out of the money” and “at the money”. The first one connotes that strike price is higher than current price in the market. The second means strike price is lower than current price in the market. The last one refers at the strike price being at the current price of the market.

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 is the Role of the Forex Option Buyer and Seller?

March 12, 2009 in Forex | No comments

The buyer and the seller are two important people in the foreign currency option market. It is these two that trade currencies and making the industry move and grow. In the market moves in favor of the seller’s direction there is no need for the seller to post other funds than the initial margin requirement. Otherwise, the seller must post supplementary funds on his foreign currency account so that its balance will stay above the maintaining balance of the margin requirement.

Paying a premium to the seller is the buyer’s primary monetary obligation for the currency options purchased up front. The moment premium is received by the seller, the buyer’s obligation to the seller ends without any margin required until such time that the foreign currency options expire or is offset.

On the date of expiration, the call buyer can now implement his right to purchase the fundamental – underlying – spot position in the foreign currency trading at the FOCs strike price. At the same time the put holder can also exercise his right to trade or sell at foreign currency option strike price the underlying FCO spot position. In most cases, foreign currency options are offset in the trading market before expiration rather than exercised by the FCO buyer.

Foreign currency options also become worthless if the spot price is lower than the strike price of the call option and if the call option’s strike price is lower than the spot price; and once the foreign currency option expires, both the buyer and the seller has no further obligation to each other.

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

6 Ways to Estimate the Value of Forex Options

March 12, 2009 in Forex | No comments

Forex options trading make use of various ways to effect the valuation of currency options. The two most popular models employed in determining the option values are the Black Scholes model and the stochastic volatility model. The former was brought about by Fischer Black and Myron Scholes, thus the name of the model. The two came up with a solution for the theoretical price of options in Europe in 1970. Though this model posed some problems in application, it nevertheless was one of the most vital methods in option valuation that served as foundation for other models.

The Stochastic volatility models, including the Heston model, are formed basically due to the volatility of the time and the price of the underlying spot. It may be solved in closed-form or via a more complex numerical methodology.

When the valuation model has been chosen from the two types mentioned, more models and techniques may be used to implement them. The analytic technique is the first one that can be used. It is a mathematical model that produces closed-form solutions. These solutions are quite useful because they can be calculated fast.

Another model for valuation implementation is the binomial tree pricing model. This involves the dynamics of the theoretical value of the forex options for a discrete time interval over the duration of the option. This model is more widely used by option traders.

Another model that negates the use of mathematical calculations and solutions, are the Monte Carlo models. These models determine the option’s value through a set of economic scenarios which yields an expected value for the options.

There are more models used to give value to the currency options. The finite difference models and other such similar methods may be employed depending on trader’s choice.

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 is the Role of an Option Writer?

March 10, 2009 in Forex | No comments

Trading forex options can be a wise move for a trader since it has many attractive features. Firstly, it is flexible to use since the options buyer dictate the precise time and price of the underlying currency pair indicated in an options contract. He may exercise his option to go through with the purchase come expiration date of just let the option expire without value. Only the premium will be the option buyer’s loss. Another good thing about currency options is that it exposes the trader to a more limited risk and requires only a small amount at the onset of the transaction. This amount is what is called the premium and serves as payment for the buyers right to the option.

Generally, to write, sell or grant an option is riskier than to buy or sell forex options. This is because the writer/seller of option may experience a loss of unlimited amount since it is his responsibility to provide for extra margin in his account to retain the position on the same level in case the market movement proves unsuccessful on his part. Another risk comes when the buyer decides to exercise his option after a break in currency movement and the seller has no choice but to settle in cash the option or give the interest. If the option is “covered” by another position, there may be lesser risk. If the option is on leverage, the seller gets an open forex position. If however the option is not at all covered, the loss on the part of the seller may be unlimited.

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

« Older entries