Hello to all. During my research I’ve come across FOREX options quite a bit. First, what’s BabyPips thoughts on them? Are they worth it?
If so, how does one trade with them? I have a general idea, that you pay for “the right” to buy at a given price for a premium. What about leverage and margins? For example, could I place an option on a currency value even though I’m leveraging at, say, 10:1? How would that affect the premiums?
What are reputable brokers for options? Thanks.
Options are already inherently leveraged instruments because you’re paying a small amount for the right to benefit (or lose) based on something much bigger. For example, to use a stock as a readily handy instrument, the November 125 call for IBM currently would cost you $5 to be exposed to a stock currently priced at $126.
You cannot buy options on margin, so you cannot leverage your option purchases, if that’s what you’re thinking.
How would options work in the context of FOREX, though? Let’s say I was watching the EUR/USD and speculated a new bullish trend was developing. Suppose I had a $1,000 and wanted a 20% profit. How would options work in that case? Maybe this would make it clearer.
I have not heard of buying or selling options contracts in the context of FOREX trading. I fail to see what the point would be. Do you have a link to the subject you might share?
Options on forex futures are readily tradeable, so let’s take an example from there. As I write this the Dec contract is trading at 1.4877. The contract represents 125,000 Euros, so basically 1.25 standard lots. That means $12.50/pip. The Dec 1.4900 Call is quoted at 238, for a total value of $2975. That $2975 is providing exposure to a futures contract worth $185,962.50.
Let’s say you think EUR/USD will rally to 1.5500 by December. The Dec futures will converge to the spot value, so they will basically be trading at the same level by that point, meaning the Dec futures would also be at about 1.5500 by the time the option expires, so your option would have an intrinsic value of 600 pips (1.5500 - 1.4900) or $7500. That’s a $4525 gain for you, about 150%.
That’s a very simple example, and there is a lot more to successful options trading than this, but it demonstrates the leverage at work.
Rhodytrader, I assume that fx options expire just like regular stock options. What is the advantage(s) of trading fx options over regular fx trading? It can’t be for the leverage…
Yes, fx options expire like stock options.
As for trading options over just trading spot, it’s a question of flexibility. When you trade spot you can either be long or short, meaning your can only benefit (or lose) based on price movement. With options you can play all kinds of different scenarios from range trading to multi-directional plays to yield strategies (covered put/call). Basically, you have an expectation of how the market is going to trade you can probably come up with an option strategy to play exactly that.
This is not me recommending options for all traders, though. They can be extremely tricky.