Posted on 26 September 2011.
The first step in learning how to trade currency options is gaining an understanding of exactly what a currency option is. Purchase of a currency option gives the buyer the right, but not the obligation, to buy or sell a form of currency at a specific time for for a specific price. In order to maintain this right, the holder must pay a fee to a broker. This fee varies depending on the amount of contracts purchased. Essentially, a foreign currency option makes it possible for an investor to profit from the changes in international exchange rates.
There are two types of currency options available to your average foreign exchange trader when learning how to trade currency options. The traditional alternative is the call option. This has the same characteristics as a stock option. It comes in two forms: the American and the European. The former type of option allows the holder to exercise his right to purchase the currency at any time up until the expiration date of the contract. The latter only allows the holder to exercise this right at the moment of expiration. These options are only rights to buy currency. They are not quantities of actual currency. If they expire, the holder only loses the money he or she paid in fees.
A special alternative to learning how to trade currency options in these traditional formats is single payment options trading. This is a very creative way of handling currency options. A trader describes a possible scenario that may occur in the exchange rates between two currencies. If the scenario, such as the rise in the value of a specific currency beyond a certain point, comes to pass then the trader receives a payout. If you learn how to trade currency options, you will be able to participate in this kind of market wager.
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