Forex Option Trading

DEFINITION of 'Forex Option Trading'

A security that allows currency traders to realize gains without having to purchase the underlying currency pair. By incorporating leverage, forex options magnify returns and set a firm downside risk level. Alternatively, currency trading options can be held alongside the underlying forex pair to lock in profits or minimize risk. In this case, limiting the upside potential is usually necessary for capping the downside as well.

BREAKING DOWN 'Forex Option Trading'

Not all retail forex brokers provide the opportunity for options trading. As such, retail forex traders should research any broker they intend on using.

Because of the risk of loss that is associated with writing options, most retail forex brokers do not allow traders to sell options contracts without high levels of capital for protection.

RELATED TERMS
  1. Forex Option & Currency Trading ...

    A security that allows currency traders to realize gains without ...
  2. Forex Hedge

    A transaction implemented by a forex trader to protect an existing ...
  3. Forex Broker

    Firms that provide currency traders with access to a trading ...
  4. Forex Spot Rate

    The current exchange rate at which a currency pair can be bought ...
  5. Forex Scalping

    A trading strategy used by forex traders to buy a currency pair ...
  6. Forex Market Hours

    The hours during which forex market participants are able to ...
Related Articles
  1. Trading

    Forex Broker Guide

    A Guide To Choosing a Forex Broker
  2. Trading

    Forex Broker Guide: Introduction

    As of January 2012, foreign exchange market accounts for more than $4 trillion in average traded daily value, making it the largest financial market in the world. No central marketplace exists ...
  3. Trading

    The Pros & Cons Of A Forex Trading Career

    Trading foreign currencies can be lucrative, but there are many risks. Investopedia explores the pros and cons of forex trading as a career choice.
  4. Trading

    Forex Traders

    A foreign exchange or Forex trader, also referred to as a retail Forex trader, is a person that seeks to obtain profit through buying and selling various currencies on the foreign exchange market. ...
  5. Trading

    Trading Forex Options: Process And Strategy

    What are the processes to trade forex options on most liquid currency pairs, and what are some strategies for success?
  6. Trading

    Forex Tutorial: Currency Trading Summary

    While this online forex tutorial only represents a fraction of all there is to know about forex trading, we hope that you've gained some insight into this topic. We also encourage those of you ...
  7. Trading

    Forex Tutorial: Foreign Exchange Risk and Benefits

    In this section, we'll take a look at some of the benefits and risks associated with the forex market. We'll also discuss how it differs from the equity market in order to get a greater understanding ...
  8. Managing Wealth

    Forex or Stock Trading: Which Works For You?

    Even though the odds favor stock trading, forex trading has several advantages to offer a particular type of investor.
  9. Trading

    Forex Trading: A Beginner's Guide

    Learn about the forex market and some beginner trading strategies to get started.
  10. Trading

    Forex Tutorial: How To Trade & Open A Forex Account

    So, you think you are ready to trade? Make sure you read this section to learn how you can go about setting up a forex account so that you can start trading currencies. We'll also mention other ...
RELATED FAQS
  1. Is it possible to trade forex options?

    Yes. Options are available for trading in almost every type of investment that trades in a market. Most investors are familiar ... Read Answer >>
  2. What methods can be used to fund a forex account?

    The forex market is where currencies from around the world are traded. In the past, currency trading was limited to certain ... Read Answer >>
  3. How does the foreign-exchange market trade 24 hours a day?

    The forex market is the largest financial market in the world, trading around $1.5 trillion each day. Trading in the forex ... Read Answer >>
  4. What are the most common currency pairs traded in the forex market?

    There are many official currencies that are used all over the world, but there only a handful of currencies that are traded ... Read Answer >>
  5. How does leverage work in the forex market?

    The concept of leverage is used by both investors and companies. Investors use leverage to significantly increase the returns ... Read Answer >>
  6. How do I use an arbitrage strategy in forex trading?

    Forex arbitrage is a risk-free trading strategy that allows retail forex traders to make a profit with no open currency exposure. ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center