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A person getting their feet wet with Forex trading may be come across and become curious about currency options trading. The first thing you need to know about options trading is that very few Forex brokers allow the sale of options contracts unless a lot of money is invested upfront. This is because they are an extremely risky form of options trading. The second thing to know is that there are about 3 billion options traded each year. There are advantages and disadvantages to this types of trading. When thinking about trading in this arena you will need to have a thorough knowledge and understanding about how options trading functions and what the actual risks of trading are.

Remember, we are talking about trading currency pairs. The most common options trading is called the “standard” or “vanilla” trading options. It is very straight forward and involves the face amount in dollars, a option put/call, and option expiration, a strike (that’s what the trade will be) and an exercise. So, let’s break this down to see what it means.

The option put/call is the right to buy or sell a currency pair at a given exchange rate at some time in the future (the expiration date). A trader has a right, not an obligation to sell. If the put rate runs out of money, the options expire and are worthless. The expiration dates are usually set at one week, one month, three months, six month, and twelve months.

When an option can only be exercised on the last day of its life, it is call a “European” exercise. When exercised, the currency option triggers a cash trade (SPOT) done at the “strike” (what you thought it would be) and for settlement on the spot value date.

An “American” exercise can be sold at any time prior to the expiration date. These are valued differently than the European exercise. They can be priced using binomial option pricing models or using a variety of numerical approximation techniques.

You will hear a lot about “Exotic option trading” also. These option have non-standard features and there are many hybrids and different types of exotic option trading choices. The exotic option used most often is the “barrier” or “knock-out” option. Both of these options have a barrier exchange rate that is called an “out-strike.” The out-strike kills the option if it is breached at anytime before the expiration date of the option.

Other types of options trading includes Double Barrier currency option, Binary options, Double Barrier Range Binary options, Average Rate currency options, Quantos Options (for hedgers), and Compound Options (options on options). Now, this is by no means a complete list of all the types of options that are used. There are many hybrids and variable options that are also traded.

The advantages of options trading that is most talked about is their increase in leveraging power which makes them cost efficient, the lower cost for this type of option which theoretically reduced the risk, and the ability to hedge against reversals in exchange rates.

Having a clear understanding of how currency options trading works, and the actual level of risk involved will be important when you are making the decision of whether or not to do options trading. Taking classes, participating in forums that are run by successful options traders, and learning the intricacies of this type of trading will be very helpful in your entry into this arena.

If you need to generate a little extra ready money currency trading, you may want to learn a bit about auto forex trading and currency trading tutorial. Day trade with confidence as soon as you are taught priceless insider hints from the experts!

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