Gamma: Gamma is derived from Delta is the odds of a change in Delta. It also informs in advance if the Delta could be changing. Gammas are positive for both the call and put. When options are deep in the money of deep out of the money the Gammas will be near zero as the probability of a change in Delta are very low. Likewise at strike price the Gamma would likely to e the highest.

Theta: Time decay is reflected in the option position as Theta. Options bought have negative Theta, which means that each day you do not sell that option, the time value is declining because of the time decay. In this case, time decay is making it worse for the buyer of the option. When you sell options, Theta is positive, meaning that time decay is good for the option seller.

Vega: How volatility affects the option pricing is reflected in the in Vega. In other words, its sensitivity to volatility. Options tend to have price increases when the underlying asset’s volatility increases. In this case, volatility is good for the buyer of an option and bad for the seller of an option. Vega is positive for long option and negative for short option.

Rho: Rho is how interest rates affect the pricing of the the option. When interest rates are high and it is good for the position, Rho will be positive. If interest rates are high but bad for the option position, Rho will be negative.

An example that we would encounter frequently is when we travel overseas and need to exchange the local currency for the foreign destination currency and we would head to the local money changer or bank to buy the foreign currency. This is a good example that we are familiar with.

By buying and selling currencies at the money changer or bank we are already involved in this huge foreign exchange market. Banks and central banks, investment funds, hedge funds, exporters and importers, companies and retail forex traders are among the main participants in the forex market.

Banks trade to generate profits and also act as buyers and sellers of one currency against another for their clients trading and commercial transaction. While central banks buy and sell currencies to hold as reserves and protect the reserves. They also act to moderate their country’s currency strength to facilitate reasonable terms of trade in the international markets for their exports and imports.

Investment funds have a percentage of their portfolio in the forex market for many reasons like diversification, hedging, etc. While most hedge funds will speculate on currencies as it is the biggest market in the world thus able to accommodate their large trading size which is quite difficult to do in the equities or futures market.

To be continue.. at – Forex Options Trading – What is Forex? (Part 2 of 2)

1. Round the clock trading 2. No need to choose from too many counters 3. Liquidity 4. Good Leverage

Next you will understand more on why you must trade forex.

5. No Brokerage fee or commission

Forex brokers mostly make from the spread between the bid and ask prices. Unlike other stock brokers where on top of the spread between the bid and ask prices, they will charge a commission based on the percentage of total value of contract.

6. Able to short currencies

In forex, there is no restriction on short selling as all currencies are traded in pairs. i.e. you buy or sell one currency against another unlike stocks and shares. Without the restrictions, a trader can react quickly to the changing dynamics of the market unlike in the equities market where short selling is discouraged or made inconvenient to do.

7. Minimum investment

You can start trading in forex from as little as USD200. The amount is dependent on the broker you are opening an account with. This is due to the leverage a trader can obtain from the broker which allows such low minimum deposit.

8. Trade globally

With the overwhelming prevalence of internet and the many easily accessible forex trading platform provided by the forex brokers, we can now trade anytime and anywhere in the world as long as we have access to the internet.

9. Unlimited Real time Demo Account Practice

Most forex brokers will allow you to open a demo trading account to practice your strategy and also get familiar with their trading platform. What this means is that you do not have to paper trade. It allows you to get as close and as real as trading in the real market without losing a cent first.

Forex Options Trading can do a very good model for people who want to do Forex Trading. What you need is a right system, the willingness to work and determination to not give until you reach your goal. If you are willing to take action, then this Forex Trading is suitable for you.

The Ask price or selling price of a currency pair is always the higher one in a price quote. While the Bid price or buying price is the price at which you buy the currency pair. What this means is that you will always buy at the higher price and sell at the lower price of a price quote.

You will notice that between the Bid and Ask price there is a difference and this difference is what we call the “Spread”. The spread is the cost of the trade or transaction. Usually this is the only cost for the trader as most forex brokers nowadays (due to competition on the internet) do not levy any additional commissions unlike when you are trading on other investment markets like equities, etc.

At the beginning it may seem confusing for a beginner as when we purchase something only 1 price is given to us. However, beginners just have to remember that you will always have to buy at the higher price of the 2 prices while selling a currency pair you would have to remember that it is the lower of the 2 prices. It doesn’t make sense for the broker to sell you at a lower price and then buy back from you at a higher price.

To be continue… on Forex Options Trading – How To Read FOREX Price Quotes (Part 2 of 3)

Why Forex Options? Options allow you to have the right but no obligation to either buy a call option or sell a put option which is an asset at the certain price as known as the strike price on the certain date too. Right in buying or selling the underlying asset, you will pay a premium upfront to the seller of the options, whether you choose to use it or exercise the right. It is all dependent upon the market movement at the time the options exipres.

I will show you What is Forex Options in 7 Easy steps….

What is a Call Options?

Call Option give the options holder, in return for paying a premium, the right but not the obligation to buy the underlying asset at a specified price within a specifie timeframe.

What is a Put Options?

Put Option give the option holder, in return for paying a premium, the right but not the obligation to sell the underlying asset at a specified price within a specific timeframe.

What is a Strike Price?

Strike price is prices at which an options holder cab buy or sell underlying instrument. Strike price are also called the exercise price.

What is a Value Date?

Value date is the date when the settlement of funds for a trade transaction will take place on your account. In Forex, the value is usually two banking days from when the trade is executed.

What is an Exercise Date?

You will exercise an option when you invoke the right to purchase or sell the underlying asset at the price stated in the option contract.

What is an Expiration Date?

The expiration date is the day which the option expires. Options that can only be exercised on the expiration date are called European options.

What is Forex Vanilla Option?

Forex Vanilla Option is an ordinary option with no special features unlike stock or future options.

As a Forex Options Trader myself, it is easy to take the advantage on the forex market. Even if the market move up or down, you will be able to profit from that. Different strategy will get different amount of premium.

As a saying… Past different from present, present different from future. Market undergoing change. Profitable strategies become detrimental. But Forex Option Trading always stay.

To further illustrate, the price quote or exchange rate tells us how much of the quote currency we must pay to obtain one unit of the base currency. Likewise. The price quote or exchange rate tells us how much we will receive in the quote currency by selling one unit of the base currency.

For example, if you wanted to buy the EUR/USD a price quote of EUR/USD of 1.3550 means that 1 EURO dollar (EUR) is equal to 1.3550 US dollars (USD). This means that to buy 1 EURO dollar (EUR), you would have to pay 1.3550 US dollars (USD).

In the above case, if the currency pair’s prices rises (i.e. the EUR/USD price goes up) it would mean that the EURO dollar (EUR) has appreciated against the US dollar (USD) which has weakened. If the EUR/USD has now risen to 1.3850 from 1.3550 it will mean that the EURO dollar is stronger now compared to the US dollar (USD) as 1 EURO dollar can buy more US dollars (USD) than before.

Likewise if the EUR/USD has now dropped to 1.3350 from 1.3550 it will mean that the EURO dollar has become weaker relative to the US dollars as 1 EURO dollar now can only purchase lesser US dollars

To be continue… on Forex Options Trading – How To Read FOREX Price Quotes (Part 3 of 3)

A forex option gives you the right but not the obligation to buy or sell a currency pair at a certain price on a certain date. The certain price in this case is called the ’strike price’. That is the option gives you the flexibility of choosing where you want to buy or sell the currency pair. The certain date in this case is called the ‘expiry’ or the expiration date of the option.

If you think that the market is going to go up then you would buy a call option. Likewise, if you think that the market is heading down, you would buy a put option. The seller (or “writer”) of the forex call option is obligated to sell the currency pair should the buyer so decide. The buyer of the call option pays a fee (called a premium) for this right.

The buyer of a forex call option wants the price of the chosen currency pair to rise in the future; the seller either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price. Call options are most profitable for the buyer when the price of the chosen currency pair has moved up past the strike price greatly. When the price of the chosen currency pair surpasses the strike price at the time of expiration, the option is said to be “in the money”. When the price of the chosen currency stays at or around the strike price at the time of expiration, the option is said to be “at the money”. When the price of the chosen currency pair goes under the strike price at the time of expiration, the option is said to be “out of the money”.

However, to be truly profitable, the gains resulting from the upward movement must also cover the cost of buying the forex call option (premium paid). For example, if the cost (premium) of buying a call option expiry in 1 week’s time is 120 pips then the chosen currency pair must move upwards more than 120 pips past the strike price. If it rises 300 pips above the strike price by expiration your profit would be (300 pips – 120 pips) 180 pips!

What is a Forex Put Options?

A forex put option gives you the right but not the obligation buy or sell a currency pair at a certain price on a certain date. The certain price in this case is called the ’strike price’. That is the option gives you the flexibility of choosing where you want to buy or sell the currency pair. The certain date in this case is called the ‘expiry’ or the expiration date of the option.

If you feel that the market is going to go down greatly then you would buy a put option. Likewise, if you think that the market is trending up, you would then buy a call option. The buyer of the put option pays a fee (called a premium) for this right as the buyer expects the price of the chosen currency pair to drop in the future while the seller expects that it will not.

Put options can only make profits for the buyer if the price of the chosen currency pair has moved down past the strike price greatly. When the price of the chosen currency pair falls past the strike price at the time of expiration, the put option is said to be “in the money”. When the price of the chosen currency stays at or around the strike price at the time of expiration, the put option is said to be “at the money”. When the price of the chosen currency pair goes above the strike price at the time of expiration, the put option is said to be “out of the money”.

Please note that the gains resulting from the downward movement must also cover the cost of buying the forex put option (premium paid) to be profitable. For example, if the cost (premium) of buying a put option expiring in 1 week’s time is 135 pips then the chosen currency pair must move downwards more than 135 pips past the strike price. If it falls 250 pips below the strike price by expiration your profit would be (250 pips – 135 pips) 115 pips!

Forex Options Trading can do a very good model for people who want to do Forex Trading. What you need is a right system, the willingness to work and determination to not give until you reach your goal. If you are willing to take action, then this Forex Trading is suitable for you.