Forex trading has become a hugely popular way for people to seek to supplement their incomes or even to get rich. Marketers selling foreign exchange trading information are making a lot of money themselves. Most trading in this market is done by individuals through various online portals over the counter.
However, the financial crisis has demonstrated how OTC markets are riskier than regulated exchanges. Now individual traders can take currency positions through exchange traded options.The International Securities Exchange (ISE) has been offered FX spot options since April 2007.
ISE options are relative to the U.S. dollar. Their prices are quoted in USD relative to the other currency. If the euro is currently worth $1.35, the USD/EUR rate is 1.35 X 100 = 135.
The rate multiplier is always 100, except for USD/JPY which is 1.
ISE FX options are settled in U.S. dollars.
ISE FX options are available through options-enabled securities brokerage accounts.
The available options are: USD/AUD (symbol -- AUX), USD/CAD (symbol -- CDD), USD/CHF (symbol -- SFC), USD/EUR (symbol -- EUI), USD/GBP (symbol -- BPX), and USD/JPY (symbol -- YUK).
The contract size is 10,000 units of the non-USD currency, 1 million in the case of the Japanese yen.
You can buy all of the same kinds of options with ISE FX that you can with stock options, index options and commodity options. Buy calls and puts, sell calls and puts, but on spreads, straddles, strangles, iron condors and butterflies.
If you are a foreign exchange trader not familiar with options, make sure you understand them before you risk your money. Options have their own characteristics, signified by Greek letters: delta, theta, gamma, vega and rho.
One significant factor is time. Options are a decaying asset. When their expiration moment arrives, they're worthless. Many people has lost a lot of money by buying calls on a stock, commodity or index they were sure would go up, because they were right too soon. It went up, but only after their option expired.
And as with all options, you're essentially either selling or buying volatility. You must make a hard-headed calculation about whether the many you're paying or receiving is to your advantage or not. You must make a serious risk/reward calculation.
You can find many FX option pricing calculators, but don't take them as gospel. As with all trading, everybody's expectations are based on past performance, but future performance is never entirely the same.
Take that government-required warning seriously, even though too many government bureaucrats and lawmakers don't.
Most forex options are priced on the basis of historical volatility, but that will change over the course of an option's life. Nobody knows how much. That's the game. If we all knew the future there'd be no need for financial markets.
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