What are the Difference Between Long Call and Long Put in Forex Option Trading?

Traditional options are offered by brokers in two different styles, the American and European styles. The former allows the trader to exercise his option any time before or on expiration date. The latter allows it only on the expiry date itself. The American style employs four basic types of trades when trading forex options. Two of them are the “long call” and the “long put”. These two trades are expressed in the spectator’s point-of-view. Not only does it give the opportunity for profit, it also allows for hedging when mixed with other positions.

In trading forex options, the options trader may do a “long call” or a “long put”. If the trader forecasts that the currency pair’s value may increase, he can choose to make a long call by purchasing the right to purchase the currency pair. He need not buy the pair immediately, just the right to buy it. He and the option seller will agree on an expiration date and a strike price. Upon expiry date, the trader may or may not go through with the purchase. He is not obliged to do the buying. The trader is likely to exercise his option if the currency pair’s value indeed increased for he could sell it to gain profit. If not, he may just let the option expire worthless and the trader’s lost is only the amount of the premium.

Long put has the very same principle as the above with the difference being that the trader predicts, this time, that the currency pair’s value will decrease and thereby offer the option to sell the pair. He is not obliged to sell it though just like with the long call. Should the currency value indeed decrease, he stands to profit from it is premium paid is less that exercise price. If not, he may not exercise his right to sell and let the option expire worthless.

Timothy Stevens is a Forex Options Trader who owns http://www.NonDirectionTrading.com – He has helped hundreds of people on Trading Forex with Options.

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