the gestalt shift

Your top 7 questions about forex options trading answered

Hi, I’ve gotten a lot of questions about forex options trading as there doesn’t seem to be that much information out there. I thought I’d list out the most common ones and help you get on the right track to trading profitably. By the way, Paul and my “Trading the Forex Market with Options” Ebook is finally available and can be downloaded here.

1. I’m just getting started and am suffering from information overload while I learn to trade forex. Will options trading make this worse? This is where options get a bad name, but for little reason. Becoming better at options trading makes you a better normal forex (spot) trader. Paul and I teach very simple strategies that involve putting together no more than 3 options together at a time (meaning you would buy or sell 3 different options at a time), and only use a few strategies that work in different market environments (ranging OR trending). Learning these strategies is quite easy and gives you a better idea of how volatility and price action work in the forex market.
2. How is options trading different from regular forex (spot) trading? Options are instruments that don’t simply increase in value as the currency pair value goes up or decreases in value when the currency pair goes down. Depending on what type of option it is, the option may have unlimited profit potential and limited loss, no matter how far the currency pair moves against your direction. By combining these options (known as “calls” and “puts” together), you can take advantage of fast moving markets in one direction, or you can profit even when you don’t know which direction price will go! You can’t do this with regular forex trading.
3. How can I use forex options to minimize my risk and maximize my return? Forex options have inherent risk protection when you buy them. For a fixed time, price can move an unlimited amount against you but you won’t lose more than the premium you paid. If price comes back, you still gain a profit, without ever getting stopped out!
4. What’s a good entry/exit method and money management system I can use with forex options? Well, this is a whole can of worms in itself and I’ll cover it in another set of posts. Just because you learn how to trade options doesn’t mean that you’ve found the “silver bullet,” or “holy grail.” Options just allow you to express your view better control your risk, and take advantage of different market environments. Once you’ve correctly assessed price direction and volatility, you can plot out an options position graphically (learn how with the “Trading the Forex Market with Options” ebook) and know exactly how much money you have at risk for wherever the market moves to, and take preemptive actions to save yourself.
5. Can forex options be used for short term trading? Yes, but I don’t see the benefit in short term trading. You are just leveraging higher to capture more money out of smaller moves, are paying more for spreads, and have to deal with short term randomness of price action.
6. What brokers offer forex option trading? More brokers are starting to offer forex options trading as it is becoming more popular. As for retail platforms, the better known ones are SaxoBank, Ikon, and Core Options. You can also trade options on currency futures, and options on the PHLX.
7. What kind of commissions/spreads do I have to pay for options? Are they expensive to trade? Options are a bit less liquid than the normal (“spot”) forex market, so the spreads are slightly higher, but if you are trading medium to longer term it should not matter. I would say that they are not that expensive at all. With typical over-the-counter (OTC) forex options brokers, you won’t pay commissions, but spreads can be from 5-20 pips depending on how exotic your currency pair is.

Saturday, February 13th, 2010, by admin and is filed under "Inefficiencies, Uncategorized, forex ebook, forex option, forex options, forex options trading, forex trading course, learn to trade forex, trade forex ". You can leave a response here, or send a Trackback from your own site.