Many people believe that forex options are easier and less risky instruments for earning money through online trading. However, let's not make premature conclusions, but just look at what Forex options are. Let's first grasp what is an option itself, and how to earn using it in the financial market.
When two parties make a contract, which includs the right to sell or buy a set amount of financial instruments or commodities, it is called an option. At the same time such a contract eliminates the obligation to purchase and sale, namely gives such right, while time and price are already stipylated in it. But you should know that there are two types of options - call option and put option. They differ in the following way: the first one is a contract granting the right to buy the item which means you have to buy it within a certain time interval at a specified agreed price. And the second one, a put option, is a contract that provides the right to sell, also within a certain time interval and at the agreed price.
Options, like all other similar transactions, have two purposes. The first one is risk hedging, ie insurance against possible losses on the main, underlying transaction. The second is a standard process of buying and selling for profit. This means that they are traded in the same way as currency pairs or stocks are by most traders.
The rapid pace of financial markets development have given the opportunity to trade options on everything that can be subject to a contract in the field of finance, ranging from simple goods to foreign currency. Forex options are not an exception. As the risk of loss in trading currencies is higher than in trading securities, an opportunity to buy and sell options on currencies play a significant positive role in the online trading process.
But before we give an example of two parallel operations of buying and selling financial instruments, it is necessary to remember the difference between the two types of options:
▪ A european option is an option, which provides a legal possibility to demand an excercise of the option, but only on the last day of its validity period.
▪ An american option is an option that, unlike European, provides a legal possibility to exercise the option during the entire validity period, including the last day.
So, if as a result of a particular analysis a trader concludes that after the news release the selected quotation will start to grow significantly, he can determine two directions of action. First - to open a purchase order based on the arguments and analysis, with following all the requirements of the trading system - to put the stop-loss and wait. And the second is to purchase a three days option at a price of 20 points.
In the first case when simply a purchase order or sell order is opened, there might be more scenarios. Stop losses might be broken out even more than once, so after the second or the third order it is worth to turn attention to the market trends. Here comes analysis again. The price might go in the opposite direction and continue moving in the opposite direction for two days or more, and only then it might turn around. Therefore, direct currency trading is perhaps the most difficult one. Forex options are a different story. What is most important for a trader is as long as during these three days the price goes in the right direction and exceeds the level of zero loss. This is the price at which the option was opened or exercised, plus those same twenty points. Moving ahead means profit.
Therefore, those who see Forex options as a source of income, have even more chances for gaining profit than currency traders. However it is worth noting that the complexity of earnings on Forex, whether it is currency or an option, has only a relative difference. It can manifest itself only in the specifics and in some nuances. In general, the level of experience and requirements to the trader do not matter whether in currency trading or currency option trading. Everything related to online trading - indexes, interest rates, currency and options – requires attention and knowledge.