Forex Options Market Overview

forex options market is a over the counter(OTC) financial vehicle for banks,international institutions and corporations.this is used by them to hedge(An investment made in order to reduce the risk of adverse price movements in a security) against foreign currency exposure.today there is lot of software available in internet for forex option trading.Today it includes lot of individuals and organisations who are concluding or hedging foreign currency exposure through phone or online trading systems.it is a investment tool for small and large investors to know apprpriate forex trading and strategies to implement.most of the forex trading is conducted through phone as the brokers available for online forex trading is very less.

definition of forex option is a financial contract giving the forex option buyer the right,to sell or buy specific forex spot contract for specific price on or before specific date.the amount the buyer pays for the seller for forex option contract right is called forex option premium.

the forex option buyer is a person who is having foreign currency or buyer of foreign currency and the choice of selling forex option contract prior to expiration date or holding the forex option contract until expiration to take a position in the foreign currency spot.the act of exercising and taking position in foreign currency spot is called as assignment.the only thing forex option buyer has to do is to pay premium to seller when the foreign currency is purchased once it is done he has no obligation until it expires.Once a foreign currency option has expired worthless, the foreign currency option contract itself expires and neither the buyer nor the seller have any further obligation to the other party

forex option seller is a grantor of foreign currency option.he takes opposite underlying foreign currency spot if buyer exercises his right.the seller assumes the adverse position in spot for premium paid by the buyer.the forex option seller should have enough funds in his account to maintain the balance above the margin.he collects the premium paid by the buyer.if the market behaviour is fine then there is no need to move additional funds into his account to maintain margin.if the market behaviour is worse then he has to move additional funds in to his account to maintain balance in his account above the margin.just like buyer seller also holds the contract until expiration.For every put buyer there is a put seller, and for every call buyer there is a call seller. The foreign currency options buyer pays a premium to the foreign currency options seller in every option transaction.

Forex Call Option - A foreign exchange call option gives the foreign exchange options buyer the right, but not the obligation, to purchase a specific foreign exchange spot contract at a specific price on or before a specific date .The foreign currency options buyer pays a premium to the foreign currency options seller in every option transaction.

The Forex Put Option - A foreign exchange put option gives the foreign exchange options buyer the right, but not the obligation, to sell a specific foreign exchange spot contract at a specific price on or before a specific date . For every put buyer there is a put seller, and for every call buyer there is a call seller. The foreign currency options buyer pays a premium to the foreign currency options seller in every option transaction.

Intrinsic & Extrinsic Value - The price of an FX option is calculated into two separate parts, the intrinsic value and the extrinsic value.The intrinsic value of an FX option is defined as the difference between the strike price and the underlying FX spot contract rate or the FX forward rate .A number of factors contribute to the calculation of the extrinsic value including, but not limited to, the volatility of the two spot currencies involved, the time left until expiration, the riskless interest rate of both currencies, the spot price of both currencies and the strike price of the FX option.

Volatility measures movements in the price of the underlying spot.high volatility leads to expire inn option and increases the risk to forex seller.

delta is defined as change in the price of the option realtive change in the spot.The delta must always be calculated in a range of zero to one (0-1.0). Generally, the delta of a deep out-of-the-money forex option will be closer to zero, the delta of an at-the-money forex option will be near .5 and delta of a deep in money would be 1.0.

Single Payment Options Trading (SPOT)
Here is how SPOT options work: the trader inputs a scenario (for example, "EUR/USD will break 1.3000 in 12 days"), obtains a premium (option cost) quote, and then receives a payout if the scenario takes place. Essentially, SPOT automatically converts your option to cash when your option trade is successful, giving you a payout.