Forex option trading is a financial instrument, which serves for both, hedging and speculating. In the past, only the large financial institutions used to use Forex option trading for hedging. However, nowadays this type of trading is also available for individual Forex traders. Just like any other type of trading, option trading has advantages and disadvantages. For example, this financial tool is very liquid and at the same time naturally very risky. Forex option buyers are called holders, and option sellers are called granters.

Forex options grant the owner the right (not obligation) to exchange a particular amount of one currency into another currency on a particular date and at a pre-agreed rate. Forex option trading is known for incurring only a limited liability. The buyer only has one obligation – to pay a premium to the seller prior to the purchasing of the foreign currency option. The seller can either buy the contract back before it expires, or to hold the contract until its expiration.

When you buy a Forex option, you are opting for a fixed price of the transaction. Forex options have a fixed amount with a fixed expiration date, rather than being tied to the markets’ fluctuations.

Exercising of the Forex options does not always occur with Forex option trading. In fact, it does not occur more often than it does. The options are usually offset until they expire. Every time the option does get exercised, the option holder is said to be assigned a spot position. In case the final strike price is below the initial purchase price, the option expires and becomes worthless.

One of the benefits of Forex option trading is that option has a fixed price. This means that you will not lose all of your capital in case the market goes against you. You will only lose the fixed price of the option. If the final strike price is higher than your purchase amount – you win. If it’s lower – you lose, and your position becomes worthless. However, you only lose a fixed amount, and no more than that.

Forex option trading has evolved as a hedging tool, and due to that it can only be used at the international currency markets. This type of trading usually holds more risks as well as more profits.

There are two types of options in Forex option trading- call options and put options. Call options give the right to buy currency, and put options give the right to sell currency. Both these options generally change in respond to the change in volatility, i.e. if the volatility falls, the prices of both options also fall. There are common and customized Forex options, respectively called “plain vanilla” and exotic.

In order to shield yourself from potential losses, it is better to follow general safety with Forex option trading:

1. Forex option trading should only involve a very small part of your capital.

2. Trade only based on proven signals.

3. Try your Forex option trading first on a demo account, in order to gain a valuable practical experience without risking any money.

Forex option trading is an additional Forex trading strategy. In order to become better diversified, you may wish to learn more about Forex option trading in addition to regular Forex trading.