Calls and Puts
Call options give the buyer the right, but not the obligation, to buy the underlying currency at a particular price, the option's strike price, by a particular date, the option's expiration date. For option buyers who think a currency will strengthen dramatically, call options permit a profit from a much smaller dollar amount than it would take to actually buy the underlying currency.
Put options give the buyer the right to sell the underlying currencies at a specific price, the option's strike price, by a specific date. For option buyers who think a currency will weaken dramatically, put options permit a profit from a much smaller dollar amount than it would take to actually sell short the underlying currency. Most buyers and sellers of foreign currency options do not exercise their rights to buy or sell, but trade out by selling the foreign currency
The Power of Leverage
Options can be used to take a position in a market in an effort to capitalize on an upward or downward market move. Options can provide an investor the benefits of both leverage and predetermined risk. The "Power of Leverage" in currency options stems from the fact that a relatively small investment (option premium costs plus commissions and fees) allows you to control a large amount of currency. This means instead of placing €5000 directly into a foreign currency and actually buying it at the current exchange rate you can leverage in excess of 100 times your money, or €500,000 for example, for a set period of time.
In other words, if a country's currency strengthens against the U.S. Dollar during your option's time period you will not earn profits on a mere €5000 worth of that currency. In this example, using the power of leverage, you could possibly earn profits on approximately €500,000 of that country's currency.
As an option buyer, you benefit from a change in the value of the underlying asset; Which, in this case, is the leveraged amount of foreign currency. Your potential losses are limited to the cost of the option. In other words, the most you could lose is all, or a part of your original investment. With our services you can use options as a financial tool that contains risk to a limited amount of risk capital, while allowing the potential for profit to remain unlimited.
Risk and Return
Option trading gives the investor the potential for enormous rewards while maintaining a limited risk. Why? Because when you buy an option you know ahead of time that your maximum risk is limited to the amount you paid for the option plus commission and fees. Having a predetermined risk with unlimited profit potential is what can make option trading attractive.
However trading foreign currencies and options on foreign currencies is far from risk free. Investors can incur losses of all or part of their original investment. Options can expire worthless. Always remember, no company can guarantee you profits, and timing is critical.
One of the cornerstones of option trading is staying power. This is because individuals who purchase options have the ability to withstand temporary adverse price movements without having to sell out their positions. With options, unlike futures contracts, there is no such thing as a margin call no matter how far out-of-the-money or against you your option goes, your downside or loss is still limited to the amount you paid for that option plus commission and fees. With an option, what matters is where the price is the day you buy the option and where the price is the day you sell your option. The ability to withstand market swings, "Staying Power" may offer the investor some peace of mind.
Options may not only give you staying power and limited risk, but they can also bring profits far greater than most types of financial opportunities. They are "high potential" reward vehicles.
Leverage means that you commit a small amount of money to control a large amount of a particular currency. The currency options we recommend usually require approximately 1 % of the leveraged amount. There are not many financial opportunities where as little as €5,000 can leverage in excess of €500,000 worth of a nation's currency.
Components of an Option
An option's strike price is the price at which the underlying currency can be acted upon.
An option's expiration date is the last day upon which it can be exercised or offset.
A straddle is a combination trading strategy in which both puts and calls are purchased in the expectation that hopes that a very significant change will occur in any direction. In a straddle investment scenario, as long as a country's currency makes a significant enough move in one direction, the profits from that side of the straddle scenario can more than compensate for the loss on the other side of the straddle showing an overall profit on the trade.
An option is said to be in-the-money when its strike price has been surpassed by the current price of the underlying currency. It is then understood to have "Intrinsic Value".
An option is said to be out of the money before its strike price has been surpassed by the current price of the underlying currency.
When an option's strike price has been met, but not surpassed, by the current price of the underlying currency the option is said to be at the money.
The intrinsic value is the amount by which the spot price is above a call option's strike price, or below a put option's strike price. An option, which has intrinsic value is said to be in-the-money. An option without intrinsic value is said to be out-of-the-money.
An option's premium is the price a put or call buyer must pay to purchase the option contract. The premium is the means by which the buyer compensates the seller for his willingness to grant the option. This premium, or price, is predetermined by many factors, which include market supply and demand. Since an option's premium is its cost, it is essential that potential traders of options understand how these option premiums are determined, as well as the factors that influence their value.
Hastings Asset Education Centre
CFDs, which are leveraged products, incur a high level of risk and can result in the loss of all your invested capital. Therefore, CFDs may not be suitable for all investors. You should not risk more than you are prepared to lose. Before deciding to trade, please ensure you understand the risks involved and take into account your level of experience. Seek independent advice if necessary. Hastings Asset Management reserves the right to make a final determination on whether or not you are eligible for any particular product or service.
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