What are FX options?
In finance, a foreign exchange option is a financial instrument that allows you to exchange money denominated in one currency for another at a predetermined rate on a specific date.
Trade FX online
Nowadays, it is possible to trade FX options online in the UK. This means that traders can take advantage of the products from the comfort of their own homes without having to go through a broker who would mediate between them and the market. Trading FX options requires a certain level of expertise. Still, it has been made easier with the advent of trading platforms and other similar technologies, which make up for the lack of experience of many novice traders.
If you plan to trade FX options online in the United Kingdom [UK], some essential facts need to be known before you start doing so. The first thing that needs clarification is what precisely an option contract represents. In basic terms, this type of financial product gives the buyer the obligation-free right to buy or sell a certain amount of an underlying asset at a predetermined price on or before a specific date.
Open an account
To trade FX options online in the UK, you need to open an account with one of the many brokers that offer this type of product. Once you have registered and deposited some funds into your account, you can start trading.
Check out Saxo if you’re looking to open a trading account.
Choose an asset
The first step is choosing the asset you want to trade options on. This could be a currency pair, such as EUR/USD, or a commodity, such as gold.
Decide on EUR/USD (put or call)
Once you have selected the asset you want to trade, you need to decide on the direction you think it will move. For instance, if you are trading options on EUR/USD and believe that the euro will appreciate against the US dollar over the next few days or weeks, you would invest in a ‘call’ option. This means that by buying the call option, the trader hopes to increase the underlying asset’s price before the expiration.
Select cash-or-nothing or digital approach
Once you have decided upon whether to go for a ‘put’ or ‘call’, it is time to select one of two approaches: cash-or-nothing or digital. A ‘cash-or-nothing option means that your return is calculated based on how much money was made on your investment at expiry. By contrast, ‘digital’ options give only two possible outcomes – either they are all out of the money, and the trader receives nothing, or they are in the money, and the payout is a fixed percentage of their investment.
FX options trading risks
Now that you understand FX options trading basics, it is time to look at some of the risks involved.
Risk of ruin
One of the biggest dangers when trading options is that you can quickly lose your entire investment if things go wrong. This is known as ‘the risk of ruin’, which all traders need to know before starting.
Another risk to consider is time decay. This occurs when an option’s time value diminishes as it gets closer to expiration. So, if you are holding an option that is about to expire and the underlying asset has not moved in your desired direction, you could find that the option has little or no value left.
Finally, it is essential to remember that FX options are derivatives products and, as such, can be highly volatile. This means that they can move at a price very quickly, so always make sure you have a solid plan in place before investing any money.
Now that you know what to look for when buying FX options online in the UK, it’s time to begin your quest for successful trading.