What is 'Forex Option Trading'

Forex Option Trading is a security that allows currency traders to realize gains without having to purchase the underlying currency pair.

BREAKING DOWN 'Forex Option Trading'

Forex Option Trading is a strategy that gives currency traders the ability to realize some of the payoffs and excitement of trading without having to go through the process of buying a currency pair.

The foreign exchange market, commonly known as the forex market or FX market, is known for its fast pace and high level of excitement. For those investors and brokers who enjoy forex trading, this combination of rapid-fire action and constant thrills is one of the most appealing aspects of participating in this marketplace. In addition, the advent of online brokerage accounts has made this marketplace more accessible to a broader group of investors from across a diverse range of demographics.

Despite the constant activity, the forex market does not necessarily represent the high-risk, high-reward scenario of some other marketplaces. At least, that can be true for those who take a conservative approach. Under normal circumstances, the forex market experiences relatively small fluctuations on a typical daily basis. On the plus side, this makes it one of the most stable and least volatile financial markets around. However, this means that at its core, this marketplace does not inherently present the types of opportunities for huge returns and big profits that many investors, especially those that thrive on the adrenaline rush of higher risk activities, tend to crave.  

Forex option trading and leverage

The key to raising the stakes, and in turn boosting the excitement level, boils down to leverage. Many currency investors and brokers take advantage of the availability of great leverage, which in the retail forex market can be as high as 250:1.

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. Those who venture into the upper range of leverage, though, expose themselves to significant risk.

Not all retail  forex brokers provide the opportunity for options trading, so retail forex traders should research any broker they intend on using to ensure they offer this opportunity if that is an important factor. 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 Account

    Opening a forex account is the first step to becoming a forex ...
  3. Foreign Exchange Market

    The foreign exchange market is the market in which participants ...
  4. Forex Trading Strategy

    A forex trading strategy is a set of analyses that a forex day ...
  5. Forex Market

    The forex market is the market in which participants including ...
  6. Currency Pairs

    Currency Pairs are two currencies with exchange rates that are ...
Related Articles
  1. Trading

    Forex Broker Guide

    A Guide To Choosing a Forex Broker
  2. Trading

    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.
  3. 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?
  4. Trading

    Forex market: Who trades currency and why

    The forex market has a lot of unique attributes that may come as a surprise for new traders. Learn more about who trades foreign currencies and why.
  5. Trading

    Working In Finance: 5 Forex Careers

    The forex markets can be both exciting and lucrative. Find out what jobs exist in this space and how to get them.
  6. Investing

    How to Choose a Forex Broker: Everything You Need to Know

    Take your time when looking for a forex broker because a bad decision can be costly.
  7. Trading

    Top Reasons Forex Traders Fail

    This market can be treacherous for unprepared investors. Find out how to avoid the mistakes that keep FX traders from succeeding.
RELATED FAQS
  1. What am I buying and selling in the forex market?

    The forex market is the largest market in the world. According to the Triennial Central Bank Survey conducted by the Bank ... Read Answer >>
  2. How do you make money trading money?

    Trading money, particularly in the forex market, is a speculative risk, as you are betting that the value of a currency will ... Read Answer >>
  3. How do you Fund a Forex Account?

    Global currencies are traded on the forex market. Here's how to tap in. Read Answer >>
  4. How can I trade in cross currency pairs if my forex account is denominated in U.S. ...

    The forex market allows individuals to trade on nearly all of the currencies in the world. However, most of the trading is ... Read Answer >>
  5. What is hedging as it relates to forex trading?

    A currency trader enters a forex hedge to protect an existing or anticipated position from an unwanted move in the foreign ... Read Answer >>
  6. What types of accounts are available for forex trading?

    There are many different types of forex accounts available to the retail forex trader. Demo accounts are offered by forex ... Read Answer >>
Hot Definitions
  1. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  2. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  3. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
Trading Center