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.

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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 is hedging as it relates to forex trading?

    When a currency trader enters into a trade with the intent of protecting an existing or anticipated position from an unwanted ... Read Answer >>
  3. 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 >>
  4. How is the value of a pip determined?

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  5. In the forex market, how is the closing price of a currency pair determined?

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