What is forex options trading? Forex options trading is the type of forex trading that allows you to buy or sell certain currency pairs at your own predetermined price in the future. With the forex options trading, you will “book” your spot to buy or sell certain currency pairs at a certain date and at a certain price from the forex brokers, and you have the rights to exercise your buy or sell rights when the deadline comes.
However, forex options it is not obligatory for you to fulfill your own forex options contract, and the forex brokers will not force you to do it. You will only exercise your rights to buy or sell the currency pairs as per the contract agreement when you think it is profitable for you to do it.
This is the interesting thing about forex options, as it gives you the right to determine your own currency pair prices in the future and execute the trade transactions only when it is profitable for you. Here are the top 5 reasons for using forex options trading in your forex investments:
#1. Buying Forex Options as a Side Investment for Your Forex Trading Activities
Trading in the forex market can have its own challenges and hurdles, including the difficulties in predicting the currency pair prices in the market. Forex options can become an alternative to your primary forex trading activities, as it will give you the opportunity to buy certain currency pairs with almost a guaranteed profit. It’s perfect for you to use as a side investment for your forex trading activities.
With forex options, you just need to pay for a certain price (called a premium) to secure you a contract to buy or sell certain currency pairs at a certain date and at a certain price. You may or may not exercise your buying or selling rights when the time comes, so even if your prediction is inaccurate, you will only lose the premium price you have paid to buy the options contract.
#2. Minimizing the Risks in Your Forex Investments
With forex options, you can minimize the risks of investing in the wrong currency pairs. You just need to buy the premium for certain currency pairs to secure your buying position, and if your prediction proves to be accurate, you can proceed with the buying transaction. Forex options don’t provide you with the obligatory contract that you need to follow. So, you are free to either proceed or back off from the forex options contract you have purchased.
In this way, you can minimize the risks in your forex investments and maximize your profit potential. You will only take action on the forex options contract when your contract proves to be profitable for you at the agreed-upon date.
#3. Securing Your Position to Buy or Sell Currency Pairs for Future Profits
With FX options trading, you can secure your position to either buy or sell certain currency pairs for future profits. You can buy the premium to secure your position to buy or sell certain currency pairs at a certain price in the future, and the premium will act as your insurance that will give you the right to buy the currency pairs according to the options contract you have purchased, regardless of their prices in the forex market at the agreed-upon date.
Thus, you can earn some profits for the future buying transaction when your prediction is accurate, such as when the price of the currency pairs is lower than the market price during the deadline period. However, you don’t need to risk spending your money to buy the currency pairs when their price is higher than the price in the forex market during the deadline.
It’s the same with selling your currency pairs using forex options. You can only sell your currency pairs at a profitable price in the future, as you don’t need to follow through the options contract for selling your currency pairs if you don’t want to sell them at a lower price during the deadline.
#4. No Contractual Obligation for You to Exercise Your Buying Rights
Another reason for using forex options trading is that forex options don’t give you any contractual obligation for you to exercise your buying rights. You can either exercise your option or not when the deadline comes. Thus, it will give you the rights to back off from the forex options contract when the contract price is not profitable for you to execute the trading transaction during the deadline period.
When this happens, you will lose your premium money, but you are not obligated to proceed through the transaction further. You can choose to continue your trading activities or buy the other forex options for some other future dates.
#5. Applying a Better Strategy in Your Forex Options Trading
Investing in forex can lead you to big losses if you don’t know how to read the movements of the market and predict the price movements of the currency pairs you are interested to invest in. Buying the currency pairs right from the forex market will put you at a bigger risk when compared to buying the forex options for the currency pairs.
By buying the forex options for the currency pairs, you can predict the prices for the currency pairs and buy them at the agreed-upon price at a later date. There will be no actual transaction for the currency pairs if you are using the forex options trading, and you don’t have any obligation to follow through in your forex options contract. Thus, you can use the forex options trading to apply a better strategy in your forex investments, where the risks of losses are very minimal to you.
Should You Use Forex Options Trading?
Not all forex broker platforms will offer you the forex options trading, so you will need to use certain forex broker platforms if you want to trade with forex options, such as CMC Markets, AvaTrade, and Interactive Brokers.
Yes, it’s preferable for you to use forex options trading if you are not sure about the price movements for certain currency pairs, as you can just buy the forex options contract and buy the currency pairs of your choice at a later date. However, it’s not quite recommended for you to use the forex options trading when currency pair prices are getting unpredictable.