FX options are trendy in the UK, with many traders taking prominent positions.
However, they have their downsides, mainly due to uncertainty about their value when trading FX online in the UK.
How an FX option works
An FX option is a derivative contract that allows you to speculate on whether the value of one currency will rise or fall.
FX options allow you to trade with a predetermined notional amount and on various currencies.
When you buy an option, you only pay a small amount upfront for the right to either exercise or not exercise it at expiration.
The pros and cons of trading FX options
The main benefit is limiting your risk exposure when speculating on the markets, especially considering that you only pay a small upfront cost.
However, the downside is that you won’t get paid if the value falls by more than 5% at expiration.
It means it may be impossible to sell the option back in the market before expiration because nobody would buy it from you for its actual value, so always check what happens to your profits if values fall by more than 5%.
FX options are contracts that have fixed expiry dates and become worthless if they expire out of the money.
The amount you can make on any given trade depends on how much leverage is available to you, the size of your account and where you decide to take your profits (if applicable).
You can trade one option contract for each pound in your account.
The sellers will often hedge their positions by buying back from the market what they’ve sold earlier, therefore making it possible for ‘naked’ traders like us to get involved without too much risk.
If we buy an FX put and sell an FX call at a lower strike rate (i.e., at a price below what we paid), this would generally be regarded as an aggressive trade.
Trading FX options online in the UK
Yes. You can easily purchase FX options after opening up a live account with any of the major online UK brokers.
They allow you to trade instantly, and their simple, user-friendly interfaces make FX options very easy to trade, even for beginners.
And with so many professionals in the UK taking prominent positions on such a regular basis, there is no shortage of liquidity when trading options contracts, which means you can always get your position filled at the price you want.
Having the edge
There are numerous reasons why trading in this market gives traders an edge over their peers who choose to remain exclusively in stock markets or commodities.
Predicting how much money will be earned on any given transaction before it takes place allows us to plan our trades strategically instead of waiting around for them to happen organically.
This way, we can ensure that our money is used as efficiently as possible instead of paying two lots of commission rates on opening and closing trades.
FX options could be considered advantageous because there are usually more opportunities available to trade due to the relatively high volume of participants involved in any given market.
Also, because there are so many online brokerages offering competitive rates, it has become possible for traders to take advantage of lower spreads than ever before, making contract prices much cheaper.
Predicting specifics stocks
Unlike other forms of trading, traders have to predict whether or not they think a specific stock will either go up or down in price during a given time frame.
Option buyers decide whether they believe the underlying market will stay around the same level or ‘go’ either side of it during the option’s life.
FX Options are top-rated in Britain and offer traders a way to limit risk when speculating on foreign exchange markets.
Their value fluctuates dramatically overnight, however, due to several factors, including economic news, product announcements etc. – but thankfully, there is no need to stay up all night watching them.
Follow Saxo capital markets for more information.