Guide to Trading Options in the Forex Market
Even though you may come across several exotic-sounding variations, at the end of the day, there are simply four basic positions to trade in the options market: buy a call option, sell a call option, buy a put option, sell a put option. When setting up a new position, you have a couple of options – you can buy or sell to open, and then close an existing trade by selling or buying to close. Whether you are buying or selling options, both types involve betting on the rise or fall of prices. Visit MultiBank Group
Basics of Options Explained
An option is a type of security that gives the holder the right, but not the obligation, to buy (call) or sell (put) a security at a certain price. A call option is when you have an agreement with someone else that you can buy something from them for an agreed-upon price. A put option is when you have an agreement with someone else that you can sell something to them for an agreed-upon price.
How to Trade Call Options
A call option, from the perspective of someone buying or holding it, enables them to purchase the underlying asset before it expires. This means something like a stock, currency, or commodity futures contract, for example. The holder of an ‘option’ has the right to purchase the asset at an agreed price but is not obligated to do so.
Options can be summarized as a contract or bet in between two parties. When you buy a call option, you are basically predicting that the underlying asset will trade at a price higher than the strike price. By this point, the option buyer could exercise their right and buy the asset from the seller (strike price) only to resell it again to earn a profit.
A call option buyer pays an upfront fee to get the right to make that deal. This fee is called a share premium and it is paid to the seller who predicts that the asset’s market price may not be greater than the rate specified in the option. In the case of most basic options, the premium is usually the seller’s profit. It can also represent the amount of risk or loss that option buyers are exposed to. The value of a premium is based on a percentage of how much possible money could be made.
How to Trade Put Options
The buyer of an option has the right to sell an underlying asset at a particular price on or prior to a certain date. This is the opposite of a call option, which gives the purchaser the right to buy an asset from the seller. When you take a put option, the buyer is essentially shorting the underlying asset because they predict it will go below the strike price. Know more Forex Trading – Trade Over 55 Currency Pairs with the Tightest Spreads with MultiBank Group
Buy to Open &Sell to Close
New traders should also be familiar with a few more terms. Term “buy to open” means that a trader is purchasing either put or call options and creating a new position with them.Purchasing to open gives a certain option more volume, which can have a positive effect on the liquidity. This would also lead to increased interest in that stock, which demonstrates the market’s expectations for it.
“Sell-to-close” is a term for closing your call or put position by selling it for a net profit or loss.