A foreign exchange option is the process of buying one type of currency and retaining the option to sell it later as a different type of currency. The ”option” part of the description means that you don’t have to sell on the specific date, but you may choose to. The two different types of foreign exchange options are the traditional call/put option and the single payment option.
Traditional call/put options work a lot like ordinary stock options and are the most common type. The ”call” part of the name pertains to the type of currency you’re buying while “put” refers to the currency type you intend to sell. These give the buyer the right to buy a certain country’s currency from the seller at a predetermined time for a specified price. Again, you aren’t obligated to buy on this date, you simply have the opportunity.
The traditional call/put option also comes in two different types. If you have an American style option, you have a much wider window of opportunity to buy the currency. These are often considered a better deal because of the increased flexibility. A European style option, conversely, allows you to purchase only at the end of your option’s specified time period.
Single Payment Options
Single payment options work in a slightly different way than the traditional variety. With a single payment option, you decide the conditions under which you would want to sell at the time that you purchase. When the trading situation matches that condition, the payout automatically happens.
You must pay a premium to set your option; if your stated scenario never happens, that premium is your only loss. This makes single payment options a good deal for investors who are more leery of risk. The premiums are higher for these than for traditional options, which is probably what keeps all investors from using them.
Buying and Selling Options
You can either trade through a broker or use an online foreign exchange trading website. These online trading websites give you more flexibility and often allow you to practice trading with a demo account before you put up any money.
There is no central marketplace for foreign exchange currencies or options; instead, options are said to be traded ”over the counter.” The transactions will take place in whichever market is currently open, meaning that you can buy or sell 24 hours per day, five days per week. Currency prices will change throughout the day, based on political and financial events that happen all over the world.
Once you learn how the markets work and practice a bit on your demo account, you will be trading foreign exchange options like a professional.