Investopedia fx options


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Option Straddle
So, what happens if the trader is neutral against the currency, but expects a short-term change in volatility ? Similar to comparable equity options plays, currency traders will construct an option straddle strategy. These are great trades for the FX portfolio in order to capture a potential breakout move or lulled pause in the exchange rate.

How To Use FX Options In Forex Trading - Investopedia

With support at and a bullish opinion of the . dollar against the Japanese yen, a trader can implement a bull put strategy in order to capture any upside potential in the currency pair. So, the trade would be broken down like this:

The Credit Spread Trade
The approach is similar for a credit spread. But instead of paying out the premium, the currency option trader is looking to profit from the premium through the spread while maintaining a trade direction. This strategy is sometimes referred to as a bull put or bear call spread. (Learn more about this and other spreads in Option Spread Strategies .)

It is very important that the strike price and expiration are the same. If they are different, this could increase the cost of the trade and decrease the likelihood of a profitable setup.

Both sets of strategies are great for directional plays. (For more on directional plays, see Trade Forex With A Directional Strategy .)

Basic Use of a Currency Option
Taking a look at Figure 6, we can see resistance formed just below the key AUD/USD exchange rate at the beginning of February 7566. We confirm this by the technical double top formation. This is a great time for a put option. An FX trader looking to short the Australian dollar against the . dollar simply buys a plain vanilla put option like the one below:

The Debit Spread Trade
Aside from trading a plain vanilla option, an FX trader can also create a spread trade. Preferred by traders, spread trades are a bit more complicated but they do become easier with practice.

The straddle is a bit simpler to set up compared to credit or debit spread trades. In a straddle, the trader knows that a breakout is imminent, but the direction is unclear. In this case, it's best to buy both a call and a put in order to capture the breakout.

FX options can be a great way to diversify and even hedge an investor's spot position. Or, they can also be used to speculate on long- or short-term market views rather than trading in the currency spot market.

Structuring trades in currency options is actually very similar to doing so in equity options. Putting aside complicated models and math, let's take a look at some basic FX option setups that are used by both novice and experienced traders.


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