What Is Single Payment Options Trading?
Single payment options trading (SPOT) is a type of option that allows investors to specify that certain conditions be met in order to receive a payout, and also gives them the opportunity to set the size of the payout if said conditions are met.
The broker providing SPOT products will determine the likelihood that the conditions will be met and charge commissions accordingly. With SPOT transactions, the outcome is limited to just two scenarios:
- Conditions set by both parties come to fruition and the investor collects the agreed-upon payout.
- The event does not occur as anticipated and the investor loses the full premium paid to the broker.
- In a SPOT transaction, a trader selects a predictive scenario, such as the EUR/USD not breaking below 1.20 within 14 days.
- The broker sets the commission based on the likelihood the investor's scenario will be met.
- If the scenario comes to pass, the trader collects a payout. If the scenario fails to come to pass, the investor loses the premium paid to the broker.
- SPOT transactions are commonly found in forex markets.
The Basics of Single Payment Options Trading
Consider for example a trader who believes the EUR/USD will not break below 1.20 within 14 days. In a SPOT transaction, they could pay a certain premium to a broker and then collect the agreed-upon payout in 14 days if this scenario turns out to be accurate. However, if the EUR/USD does in fact break below 1.20 within that time, the investor would lose the full amount of the premium.
The true benefit of SPOTs is the relative ease and simplicity for investors. In order to facilitate SPOT transactions, an investor only needs to envision scenarios for any currency pair. On the other hand, SPOT options can be intimidating for first-time SPOT investors, because the limitless number of predictive scenarios can feel daunting. Fortunately, there are ways to simplify the selection process.
For example, the "one-touch spot" option will yield a payout merely if the exchange rate reaches a certain level before the expiration date. However, the payout is limited, and it is determined both by the duration of the option and the difference between the one-touch amount and the current exchange rate at the time of purchase.
Alternatively, investors may also engage a "no-touch spot" option, in which they will receive a payout if the exchange rate on a currency pair does not reach a certain level before expiration.
While many investors new to forex spot options first get their feet wet with the standard one-touch and no-touch options, it’s usually not long before they become comfortable with writing their own options with different self-selected scenarios.