Forex Training

Class 4

Trading Currency Options

CBF now offers online currency option trading from the Standard and Mini Forex trading platform.   Whether you are new to options trading or an experienced professional, CBF provides the pricing, trading, and position tracking functionality that are key to long term options trading success. 

Buying options provides customers unlimited upside from movements in currencies with limited risk. Articles  below to begin learning the basics of options trading, or skip to the Free Demo account if you are ready to begin practicing with CBF's trading software:

How Options Work

Options are an extremely versatile trading instrument. Since options cost less than the underlying asset (in this case the currency pair), they provide a high leverage approach to trading that can significantly limit the overall risk of a trade. Simply put, option buyers have rights and option sellers have obligations. Option buyers have the right, but not the obligation, to buy (call) or sell (put) the underlying currency at a specified price until the expiration date of the option. There are two kinds of options: calls and puts. Call options give you the right to buy the underlying asset. Put options give you the right to sell the underlying asset. It is essential to become familiar with the inner workings of both. Every strategy you learn from this point on depends on your thorough understanding of these two kinds of options.

There are no margin requirements if you want to purchase an option because your risk is limited to the price of the option.  CBF's online trading system allows for buying options and closing out these positions.

To trade options, you must be acquainted with the select terminology of the option market. The price at which an underlying currency can be bought or sold if the option is exercised is called the strike price. Options are available in several strike prices above and below the current price of the underlying currency.

The date the option expires is referred to as the expiration date or Expiry. The option Expiry is specified by the CBF client before the option is priced and purchased.

The price of an option is called the premium. An option's premium is determined by a number of factors including the type of option (call or put), the current price of the underlying currency pair, the strike price of the option, the time remaining until expiration, and volatility. An option premium is priced on a per lot basis.  Buying an option creates a debit in the amount of the premium to the buyer's trading account.  CBF's trading software will quote the premium in terms of both the "Option Price" (the cost in pips of the option) and the "Option Cost" (the total dollar cost of the option).

How Options Work Review

  1. Options give you the right to buy or sell an underlying instrument.

  2. If you buy an option, you are not obligated to buy or sell the underlying instrument; you simply have the right to do so.

  3. Options are good for a specified period of time, after which they expire and you lose your right to buy or sell the underlying instrument at the specified price.

  4. Options when bought are done so at a debit to the buyer.

  5. Options are available in several strike prices representing the price of the underlying instrument.

  6. The cost of an option is referred to as the option premium. The price reflects a variety of factors including the type of option, the current price of the instrument, the strike price of the option, the time remaining until expiration, and volatility.

  7. Options are currently available on all major currencies in CBF's Standard Forex and Mini Forex trading accounts.

How You Can Use Options

Options can be used in a variety of ways to profit from a rise or fall in the underlying currency pair. The most basic strategies employ put and call options as a low capital means of garnering a profit on market movement. Options can also be used as insurance policies in a wide variety of trading scenarios. You probably have insurance on your car or house because it is the responsible and safe thing to do. Options provide the same kind of safety net for trades and investments. They also increase your leverage by enabling you to control the currency pair without tying up a large amount of capital in your trading account.

The amazing versatility that an option offers in today's highly volatile markets is welcome relief from the uncertainties of traditional trading practices. Options can be used to offer protection from a decline in the exchange rate of a long underlying currency position or an increase in the exchange rate of a short underlying currency position. They can enable you to buy a currency at a lower price or sell a currency at a higher price. You can also use option strategies to profit from a move in the price of the underlying currency rate regardless of market direction.

There are three general market directions: up, down, and sideways. It is important to assess potential market movement when you are placing a trade. If the market is going up, you can buy calls or buy the underlying currency. Do you have any other available choices? Yes, you can combine long options and positions in the underlying currency in a wide variety of strategies. These strategies limit your risk while taking advantage of market movement.

Bullish Limited Risk Strategies Bearish Limited Risk Strategies
1. Buy Call

or

2. Buy underlying currency and buy a Put

1. Buy Put

or

2. Sell underlying currency and buy a Call

It is of paramount importance to be creative with your trading. Creativity is rare in the stock and options market. That's why it's such a winning tactic. It has the potential to beat the next person down the street. You have a chance to look at different scenarios that they do not have the knowledge to construct. All you need to do is take one step above the next guy for you to start making money. Luckily the next person, typically, does not know how to trade creatively.

Closing Your Options Position

Once you own an option, there are two methods that can be used to make a profit or avoid loss: close it out (that is, sell it back) at the current market price, or let it expire.

Closing out is a method of reversing the original transaction to exit the trade. If you bought a call, you have to sell the call with the same strike price and expiration.   If you bought a put, you have to sell a put with the same strike price and expiration. CBF's online trading system makes it easy to sell back the exact option which you bought.  You simply find it in the Options window on your trading platform, and right-click on it to select "close".

Expiration - if an option has no value at expiration, and it has not been closed out, the option expires worthless and no further action is required.  If an option is "in-the-money" at expiration (meaning that for a Call, the underlying currency price is above the strike price, or for a Put, the underlying currency price is below the strike price) then your account will automatically buy the currency instrument at the strike price (for a call) or sell the currency instrument at the strike price (for a put).  Such in-the-money expirations will always result in a profitable underlying currency position, and this currency position can immediately be closed out for a profit if you do not wish to maintain this outright position.

Summary

Exit the option position by closing: 
right-click on the position for a live current market price at which you can sell back the option you have purchased

Exit the option position by letting it expire:
Call:  If the underlying currency rate is above the strike price, your account will automatically buy the currency at the strike price.  You can then sell this currency at the current market price for an immediate profit if you wish.  If the underlying currency rate is below the strike price, then the option expires worthless and no currency position is established.

Put:  If the underlying currency rate is below the strike price, your account will automatically sell the currency at the strike price.  You can then buy back this currency at the current market price for an immediate profit if you wish.  If the underlying currency rate is above the strike price, then the option expires worthless and no currency position is established.

Next:  Practice with a Free Demo Account

 

 

 

 
 Margins start as low as % 0.5 (optional)
 
Client's of the CBF accounts between US$ 3,000 to US$ 20,000 will get a leverage margin of %0.5 as an option, between US$ 20,001 to US$ 50,000 will get a leverage margin of %1 as an option, and from US$ 50,001 will get leverage margin of %2. (NOTE: %2 is the default margin of all mentioned accounts).
 
 
Spreads start as low as 1
 
In CBF Trading system spreads start as low as 1 in Forex. You can read full list in the CBF Trading - Market Sheets.
 
 
CFD and Forex
 
Client's can trade now with CFD's (equities, indices, commodities, bonds, interest rates, forex, inflation). The hedging facility is available on all instruments.
 
 
Commission-Free trading
 
CBF do not charge a commission on its services and you can read about the Free commission by walk through CBF Trading - Market Sheets.
 
 
US$ 3,000 Minimum to open account
 
Live account with CBF Trading start from minimum deposit of US$ 3,000 only.
 
 
Dedicated accounts
 
CBF Trading Division is a part of Century Brothers Financial Limited, the trading giant in the financial industries and the first company offering dedicated accounts for the US$ 100,000 clients with independent third party "AA+" banks and high security solutions for any other clients fund.
 
 
All in one platform
 
Within one account you can trade CFD and Forex. In CBF Trading system competitive pricing on multi financial instruments, including indices, real-time margin calculation and risk-management notifications, easy software and technology for complete trading confidence, visual trading and one-click order entry, and place trailing stops and other order types to help manage your risk. You will get totally FREE services such as real time quotes, real time charts, analytics, and multi languages.
 
 
 
 
 
 
 
 
 
 
 
 
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