Understanding Forex Options Brokers

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Forex Options Trading

What is Forex Options Trading?

Forex options are derivatives based on underlying currency pairs. Trading forex options involves a wide variety of strategies available for use in forex markets. The strategy a trader may employ depends largely on the kind of option they choose and the broker or platform through which it is offered. The characteristics of options in decentralized forex markets vary much more widely than options in the more centralized exchanges of stock and futures markets.

Key Takeaways

  • Forex options trade with no obligation to deliver a physical asset.
  • These options vary widely from one product to another depending on which entity is offering the option.
  • Forex options come in two varieties, so-called vanilla options and SPOT options.
  • SPOT options are binary in nature and pay out (or not) depending on the final condition of the option.

Understanding Forex Options Trading

Options traded in the forex marketplace differ from other markets in that they allow traders to trade without taking actual delivery of the asset. Forex options trade over-the-counter (OTC), and traders can choose prices and expiration dates which suit their hedging or profit strategy needs. Unlike futures, where the trader must fulfill the terms of the contract, options traders do not have that obligation at expiration.

Traders like to use forex options trading for several reasons. They have a limit to their downside risk and may lose only the premium they paid to buy the options, but they have unlimited upside potential. Some traders will use FX options trading to hedge open positions they may hold in the forex cash market. As opposed to a futures market, the cash market, also called the physical and spot market, has the immediate settlement of transactions involving commodities and securities. Traders also like forex options trading because it gives them a chance to trade and profit on the prediction of the market’s direction based on economic, political, or other news.

However, the premium charged on forex options trading contracts can be quite high. The premium depends on the strike price and expiration date. Also, once you buy an option contract, they cannot be re-traded or sold. Forex options trading is complex and has many moving parts making it difficult to determine their value. Risk include interest rate differentials (IRD), market volatility, the time horizon for expiration, and the current price of the currency pair.

Forex Options Trading is a strategy that gives currency traders the ability to realize some of the payoffs and excitement of trading without having to go through the process of buying a currency pair.

Primary Types of Forex Options Trading

There are two types of options primarily available to retail forex traders for currency options trading. Both kinds of trades involve short-term trades of a currency pair with a focus on the future interest rates of the pair.

  1. The traditional call or put option. With a traditional, or vanilla, options contract the trader has the right but is not obligated, to buy or sell any particular currency at the agreed upon price and execution date. The trade will still involve being long one currency and short another currency pair. In essence, the buyer will state how much they would like to buy, the price they want to buy at, and the date for expiration. A seller will then respond with a quoted premium for the trade. Traditional options may have American or European style expirations. Both the put and call options give traders a right, but there is no obligation. If the current exchange rate puts the options out of the money (OTM), then they will expire worthlessly.
  2. A single payment option trading (SPOT) product has a more flexible contract structure than the traditional options. This strategy is an all-or-nothing type of trade, and they are also known as binary or digital options. The buyer will offer a scenario, such as EUR/USD will break 1.3000 in 12 days. They will receive premium quotes representing a payout based on the probability of the event taking place. If this event takes place, the buyer gets a profit. If the situation does not occur, the buyer will lose the premium they paid. SPOT contracts require a higher premium than traditional options contracts do. Also, SPOT contracts may be written to pay out if they reach a specific point, several specific points, or if it does not reach a particular point at all. Of course, premium requirements will be higher with specialized options structures.

Not all retail forex brokers provide the opportunity for options trading, so retail forex traders should research any broker they intend on using to ensure they offer this opportunity. Due to the risk of loss associated with writing options, most retail forex brokers do not allow traders to sell options contracts without high levels of capital for protection.

Is It Possible to Trade Forex Options?

Options are available for trading in almost every type of investment that trades in a market. Most investors are familiar with stock or equity options, however, there are options available to the retail forex currency trader as well.

Currency Option Trading

There are two primary types of options available to retail forex traders for currency option trading.

Call / Put Options

The first is the traditional call or put option. The call gives the buyer the right to purchase a currency pair at a given exchange rate at some time in the future. The put option gives the buyer the right to sell a currency pair at a given exchange rate at some time in the future. Both the put and call options give investors a right to buy or sell, but there is no obligation. If the current exchange rate puts the options out of the money, then the options will expire worthlessly.

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Single Payment Options Trading (SPOT)

Alternatively, the other type of option available to retail forex traders for currency option trading is the single payment options trading (SPOT) option. SPOT options have a higher premium cost compared to traditional options, but they are easier to set and execute.

A currency trader buys a SPOT option by inputting the desired scenario (ex. “I think EUR/USD will have an exchange rate above 1.5205, 15 days from now,”) and a premium will be quoted. If the buyer purchases this option, then the SPOT will automatically pay out should the scenario occur. Essentially, the option is automatically converted to cash.

Using Exotic Options

Options are used by forex currency traders to make a profit or protect against a loss. It is also important to note that there is a wide variety of exotic options that can be used by professional forex traders, but most of these contracts are thinly traded because they are only offered over the counter. Because options contracts implement leverage, traders are able to profit from much smaller moves when using an options contract than in a traditional retail forex trade.

When combining traditional positions with a forex option, hedging strategies can be used to minimize the risk of loss. Options strategies such as straddles, strangles, and spreads are popular methods for limiting the potential of loss in a currency trade.

How to Trade Forex Options Online

Not all retail forex brokers provide the opportunity for options trading within your accounts. Retail forex traders should be sure to research the broker they intend on using to determine whether everything that will be required is available. For forex traders who intend to trade forex options online—for either profit or risk management—having a broker that allows you to trade options alongside traditional positions is valuable. Alternatively, traders can open a separate account and buy options through a different broker.

Because of the risk of loss when writing options, most retail forex brokers do not allow traders to sell options contracts without high levels of capital for protection.

Understanding Forex Brokers & Signal Providers

Having a good Forex broker is perhaps one of the most important factors when it comes to being a successful foreign exchange trader. Sure, there are many good brokers out there, but finding one of those good ones is much easier said than done. There are a whole lot of unreliable brokers out there which will scam you and steal your money the first chance they get. We want to help you find a good broker out there, one that is reliable, reputable, and at the end of the day profitable too. Here are some of the most important things to keep in mind when choosing a Forex broker to use.

Need To Be Regulated

The most important thing to look out for is regulation. There are many governmental and financial agencies out there which are responsible for regulation brokers. Regulations are those things which restrict brokers and control them, with the ends of making sure that they don’t engage in fraudulent practices. A regulated broker is a safe broker. Before you choose a broker, make sure that they are regulated, that they are reliable, and also check to see if they are a scam broker or not.

Brokerage Features

Another important thing to look out for when choosing a broker is what kind of features the platform has. You want to have access to as many features as possible including portfolio building, automated account management, portfolio advisors, charting solutions, analysis, and even more. A general rule of thumb is that the more features a broker has, the better off you are.

Cost & Profits

The final thing to look out for before choosing a broker is how much they cost to use and how much money they can make for you. A good broker will be affordable to use and will also have a very high profit potential.

Best Forex Brokers

To give you a good head start, and so you don’t have to go searching on your own, here we have a few awesome Forex brokers for you to choose from. All of the brokers listed below are reliable, regulated, and highly profitable.

VantageFX.com – This broker features a whole lot of options and various trading features, it is AU regulated, and shown to be quite profitable.

Invest.com – This is one of the highest regulated brokers out there and conforms with over 11 different regulation agencies including CySEC. You can get a free demo account, and a full-fledged account will give you access to a plethora of trading features.

EasyMarkets.com – This broker is CySEC regulated and is also in compliance with MiFID as well as ASIC. With this broker you can deposit a minimum of $100 and get access to a multitude of features, plus it has the ability to engage in foreign exchange and CFD trading.

Top Forex Signal Services

In case you need some good Forex signal services to use, here we have two awesome ones.

BinaryOptionsTradingSignals.com

This is one of the most profitable, reliable, and best performing signal services out there for both Forex and BO. This is a live investment platform that has been in use across the world for the last 6 years. The live investment feature means that you can talk to day traders to get up to date advice and info regarding trades. This signal service has an average ITM rate of 75% and can help you generate several thousand dollars per month. You will like the fact that this service only costs $97 and does not require you to sign up with a broker.

Mike’s Signal Group

This is by far the largest signal service out there with over 12,000 current members signed up. This signal service can provide you with ITM rates anywhere from 70% to 85% on a good day. If you need a good signal service, this is perhaps the very best one to go with.

FAQ’s – FOREX, Signals, & Software

You may not know everything there is to know about Forex, which is why we have answers to the most frequently asked questions out there. Let’s get right to the point.

What Are Forex Signals?

Forex signals provide you with essential info in terms of the best trades to make, recommended expiry dates, stop-loss, and everything else you need to know to make a good trade. These signals can be provided by charting solutions, special software, and real life service providers, plus they can come to you in the form of email, text message, or through special features in your trading platform.

What Is An Indicator?

An indicator is a technical solution that can be applied to your specific charting solution. It is a type of software that can be used for generating and signaling trades. Indicators tell a potential investor if there is a good possibility of an investment being profitable.

Are There Free Indicators?

Lots of free indicators can be found as parts of charting solutions. Many indicators will offer you a plethora of customizable technical indications to help you make trades. Some of the best ones include Traders Way MT4, FreeStockCharts, MetaTrader 4 & 5, and HotForex Meta Trader.

How Do I Get Free Signals?

The simple fact of the matter is that getting free signals is nearly impossible. Most providers that offer signals will require a minimum deposit with a broker, or if the signals are free, chances are that it is actually a scam.

Is There A Difference Between Independent Signal Providers & A Forex Broker’s Signals?

Forex broker signals are usually only available after you deposit money. If possible, use an independent provider, because making a deposit with a signal service means that your money is not completely in your control anymore, and if you aren’t careful you may be giving your money to scam artists. ON the other hand, independent signal providers are usually run by trading veterans who are responsible, reliable, know what they are doing, and most important, have no reason to try and steal your money.

Is There A Difference Between Forex & Binary Options?

The main difference between the two is that BO makes you trade against the brokers or other investors, whereas with Forex you are trading in the actual financial market, not just some derivative like with BO. BO features a little less liquidity than Forex, it has more trading options than Forex, and doing BO trading is also a little simpler than Forex.

Are There Free Forex Demo Accounts?

There are free demo accounts you can use to practice your Forex trading, such as Invest.com, which gives you a demo and $10,000 fake dollars to hone your skills.

Will I Always Make Money With Forex Trading?

Forex is a good way to make money, especially because a recent host of regulations have made it very safe. A good Forex broker and signal service will definitely help you make money, even with an average ITM rate as low as 70%. Do keep in mind, this is trading and with trading comes risk, risk of loss. There is always a chance of losing your money, all of it, but there is also a good chance of making a profit too.

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    Binarium

    Top Binary Options Broker 2020!
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    Big Sign-Up Bonus!

  • Binomo
    Binomo

    Trustful Broker. Recommended Only For Experienced Traders!

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