In the commodity, forex, and futures trading markets, the trader has two basic choices to trade. He can either go for Forex options trading or commodity futures trading. With Forex options trading, the trader must predict the exchange rate of the currency pair at a specific time and buy a call option or a put option from the seller at a specific price. If the trader forecasts that the currency pair will reach the level at the specified future date, he has a no-loss option. The trader has the right to purchase these options at his option charging only a small fee. If this happens, the no- loss option would be worthless. If the trader feels that the price of the currency pair will dive in the near term, he has a good chance of making a profit.
Using Forex Options Trading
With forex options, the trader can buy the right to purchase a share at a specific time from the buyer at a small discount. Here the buyer is trading as a buyer (or writer) in the underlying future contract. The trader purchases the option contract but does not own the right to buy or to sell it until the contract expires. The money remains a floating value in the underlying future contract. When the contract expires, either the buyer will have to pay the money to the seller or the seller will have to pay the money to the buyer.
Two ways of trading
The writer is the buyer in this system and expects to buy the property or commodity at the strike price and holding it until the contract expires. He does not have any obligation to do this because he does not purchase an asset he is not yet familiar with. He assumes that the value of the property will go in the direction he predicts. From this, he can simply wait for the price to drop thus minimizing his cost. He will also have the benefit of the premium he has paid thus making it clear that he will profit provided he is right in his forecast. Only if he is incorrect and the commodity prices do not move in his favor does he have any cost? This is a system involving a greater risk of loss than a transaction for the trader. If the prices move in the opposite direction than he predicts, he will lose money unless he has insurance from the option seller.
Meanwhile, the borrower is the seller in this system as the buyer has purchased the option contract. He is in constant communication with the buyer as it is his job to evaluate the market conditions for the upcoming contract. He needs to know what will happen with the option and how his obligation will be settled if the transaction turns favorable. Price uncertainties are part of everyday life and it is sometimes difficult to predict what will happen especially in the underlying commodity.
There are three types of options with Forex trading:
1. The Stock Option
This is the most common and the basic option available in Forex trading. It can be a very risky option if it does not have adequate risk protection measures. It usually is exercised in the foreign exchange market. In it, the trader will try to predict whether the share price will go up or down. The potential risk is in paying a fortune for the right to buy the shares at a specified price. If successful, there will be a profitable margin. If unsuccessful, there will be a very high cost.
2. The Put Option
This option is exercised in the foreign currency market. In it, the trader gives his word on whether he will buy or sell the specified security. He anticipates that the price of the security will go down and in turn, he will profit from that. If successful, he gains the premium. If unsuccessful, he losses his premium.
3. The Surety Bond/The Bond
This options product is very attractive as it enables the trader to retain the rights of the customer indefinitely, as long as the market conditions remain favorable. When the credit or market condition becomes unfavorable, it enables the trader to simply wait and know that his rights will be exercised only if the market is favorable to him. The profit margin in this type is very high as there is only a very little cost associated with a sale. The trader benefits from the lower cost of these types of options.
Pricing options – made easy
A good option pricing strategy combines a lot of factors. The trader has to combine these factors in such a way that the outcome will be profitable. He has to predict a reasonable possibility before he can start his transaction. Once the factors for success are identified, the trader should then wisely select the option contract fits his trading strategy, and predict the fair strike price for the option he is going to purchase.
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