Fx Options Trade Sample

FX Options Trading are used to express a view on the current market – like trading Forex, but instead of placing a Sell order or a Buy, we use Call or Put. If you purchase a Call option, you expect price to rise, while buying a Put option, means your view on the market is for it to go down –  you expect price to drop.

Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital.

Participants in the Options Market 

There are four types of participants in options markets depending on the position they take:

1. Buyers of calls
2. Sellers of calls
3. Buyers of puts
4. Sellers of puts

Key Terms to be remember:

Holders -people who buy options

Writers -people who sell options

Buyers - have long positions

Sellers - have short positions

Strike price - the price at which an underlying stock can be purchased or sold.

Premium – is the total cost of an option, which is determined by factors including the stock price, strike price and time remaining until expiration.

LEAPS - known as Long term options. 

The Important Distinction between buyers and sellers:
-Call holders and put holders (buyers) are not obligated to buy or sell. They have the choice to exercise their rights if they choose.
-Call writers and put writers (sellers), however, are obligated to buy or sell. This means that a seller may be required to make good on a promise to buy or sell.

Advantages of Trading FX Options with ICM Brokers

• Investors can limit their downside risk to the option premium (the amount paid to purchase the option).
• Profit potential may be maximized during correct market moves on the underlying instrument.
• Often the price of the up-front price of the option may be less than a regular Spot FOREX position.
• Investors can set their desired strike price and expiration date.
• Options can be used to hedge against open spot positions in order to limit risk.
• Spot Traders can use options to predict market moves before the fundamental events take place, without risking a big capital outlay. 

Calculation Examples

Call Option
Investor buys a EURUSD Call option contract from ICM Brokers. The Option contract parameters being:

Notional Amount   EUR 1.000,000
Currency Pair        EURUSD
Option Type         Call/Put
Strike Price          1.4300
Expiry Date          1 month
Premium              $ 5,350
   

- On Expiry Date -

1. If the spot market is above 1.4300 at maturity, the option will be exercised and investor will have a buy position of Euro 1 Mio against USD at 1.4300
2. If the spot market be at or below 1.4300, the option will expire worthless.

Put Option
Investor buys a EURUSD Put option contract from ICM Brokers. The option contract parameters are same as table above:

- On Expiry Date -

1. If the spot market is below 1.4300, the option will be exercised and investor will have a short position of Euro 1 Mio against USD at 1.4300
2. If the spot market be at or above 1.4300, the option will expire worthless.

I hope this has given you some insight into the world of options. Once again, we must emphasize that options aren't for all investors. Options are sophisticated trading tools that can be dangerous if you don't educate yourself before using them. Please use this as a guide and intended as a starting point to learning more about options.

 

To know more about our ICM Brokers Contract Specifications please click the link: ICMBrokers Contract Specifications