The Skinny on Options in the Forex Market

Although the forex market has always been touted as an exact opposite of the stock market, there are many similarities between the two that many are not aware of. One of these glaring similarities is the existence of options both in the stock market and in the forex.

Though identified more with the stock market than with the forex, options nevertheless play an integral part in the field of currency exchange. Options are basically tools for reducing the risk of potential losses particularly in times of high financial volatility by letting traders buy or sell currencies at a specific price in a specific time.

There are essentially two types of options; the traditional and the single payment options trading, commonly called as 'SPOTs'.

Traditional options are very much like their stock market counterparts. They work by letting traders buy or sell a currency from a seller at a given price and time. This type can be used effectively in the event that the pre-determined currency appreciates as the trader can sell the particular currency for large profit. In the event that the currency depreciates on the other hand, the trader can simply abandon the option, losing nothing but the premium paid for it.

SPOTs on the other hand, revolve around forex forecasts of traders. SPOTs work with a forex forecast inputted by the trader using it. If the forecast do come true, the trader then receives a payout from the option. For instance, a trader inputs a forecast involving the euro and the dollar. The forecast predicts that the EUR/USD will hit 1.50 in a week. If the EUR/USD exchange rate really does hit 1.50 within a week, the trader will then receive a particular amount for the right prediction.

One of the advantages of SPOTs is that they are easier to use as everything that traders have to do is input their forecasts and wait if they will come true within the time that they have inputted. If the forecast does not realize within the time specified however, the trader will lose nothing but the premium paid like in the case of traditional options. The only apparent disadvantage of SPOTs from the traditional is their more expensive premiums which might be costly for newbie traders.

Options have always been associated with the stock market. This, however, is an unfortunate misconception as the forex market also offers these tools that can help traders, new and seasoned alike, in minimizing losses and maximizing gains by reducing risks and setting up more opportunities for profit in the forex.