FX options explained

Learn everything you need to know about trading forex options. Here, we look at the essentials of buying and selling currency options.

 

What are forex/currency options?

Forex/currency options are derivatives that give you the right, but not the obligation to buy and sell FX on a specific date (called the expiry) at a specific price (called the strike price). There are two types of forex options: puts and calls.

Remember, forex trading in general is a way to speculate on currencies without taking ownership of the physical assets. You can choose between FX options, spot currency trading or FX forwards . Many individuals prefer trading forex options because it offers limited risk when buying, as they are not obliged to complete the purchase. However, the risk is potentially unlimited when selling.

 

Forex/currency options essentials

Keep these four things in mind if you’re thinking about trading forex/currency options:

You’re always trading a currency pair with FX options

When you trade FX options, you are buying the right to trade a currency pair at a specific price on a specific date. This means you intend to buy one currency (the base currency) and sell another (the quote currency) because you believe one of the currencies will strengthen against the other. When trading options with us, you are entering into a contract for difference (CFD).

 

 

You can trade FX put or call options

There are two types of currency options you can trade: puts and calls.

 

Call options in forex

You’d buy a forex call option if you thought the base currency will strengthen against the quote currency before the expiry date. For example, you would buy a GBP/USD call option if you thought GBP would rise in value against USD. Your potential profit would be unlimited in this case, and your losses would be limited to your options premium.

 

 

You can also sell FX call options – if you believe the quote will rise against the base currency. However, this could result in unlimited losses if the pair doesn’t move in your favour.

 

 

 

Put options in forex

You’d buy a forex put option if you thought the quote currency will strengthen against the base currency before expiry. For example, you would buy a GBP/USD put option if you thought USD would rise in value against GBP. Again, your potential profit would be unlimited in this case, and your losses would be limited to your options premium.

 

 

You can also sell forex put options if you believe the base currency will rise against the quote. Note that this could result in unlimited losses if the pair doesn’t move in your favour.

 

 

 

You can hedge other positions with FX options

Hedging with options involves opening a position that will offset risk to an existing trade, such as an open spot forex position. For example, an FX put option is a popular method of protecting yourself against the depreciation of a currency. In this instance, you’d open an option with a strike price below the current market level, and if the market moves below that put option price, you’d profit from the decline.

 

 

 

You can speculate on currency markets with less risk

Buying forex puts or calls comes with lower risk than spot forex trading or FX forwards, because you can only lose your initial option premium (margin) if the trade doesn’t go your way. However, option premiums can be quite high, your risk is unlimited when selling options, and not all FX options markets are available 24 hours a day.

 

How to trade forex/currency option

 

Make sure FX options is how you want to trade currency

Besides trading forex options, you can also trade spot forex or FX forwards. Plus, we’re one of the few providers to offer forex trading on Saturday and Sunday with our Weekend GBP/USD, Weekend EUR/USD and Weekend USD/JPY offerings.

 

	Forex options	Spot forex
How it’s priced	Based on spot price	‘On the spot’, with continuous, real-time pricing
Weekday trading hours	9pm Sunday to 10.15pm Friday (UK time) Break from 8-9pm for daily options	9pm Sunday to 10.15pm Friday (UK time)
Weekend trading hours	Not available	8am Saturday to 8.40pm Sunday (UK time) on GBP/USD, EUR/USD and USD/JPY
How many pairs can I trade?	9	80+
Costs and charges	Higher premium but no overnight funding charges	Narrower spread but with overnight funding charges
Risk to capital	Limited to premium if you buy put or call, could lose more than premium if you sell	You could lose more than your deposit (margin)
Expiry	Yes	Yes