Trading The World Of Forex Options- Buying Puts and Calls

The concept of Forex Options when buying a call on an asset that is likely to go up, or buying a put on an asset that is likely to go down, is to take the risk on a potential trade (the stop loss amount), and invest that same amount in an Options play. For example, a spot forex euro trade that has a 60 pip stop loss, on one Standard lot, will equal $600 of risk. If that stop loss gets hit, the spot market trade is dead. However, by placing that same $600 in a euro option, the premium (risk) is now invested in time thus giving the Option time to follow through to it target.

If the pull-back to the original spot market stop loss gets hit, the Options trade is still open until the expiration date is reached, (normally one month away). The $600 premium may have lost some value, but unlike the dead stop on a spot market trade, this Option still has time to try to regain the lost pips if the market is just trying to find direction. The buying of a call to go up, or buying a put to go down limits the risk to the initial premium paid ($600 in this example).

Global Options can be the vehicle to remove the intra-day volatility that impedes the best laid plans of spot/cash market signals, and with the proper risk management responsibilities executed, can provide traders with another opportunity for a plan to come to fruition.