Doing currency option trading is a great short term strategy for the forex market. It’s a way to limit the risk you take while your potential for return is limitless. Here are some of the benefits of using currency options.
Let me go over first how options work. You buy an options contract from a seller. The contract has the number of lots of the currency pair, which is the quantity. It also has an expiration date as well as a premium, which is what you pay for the contract. It also has a strike price, which is the price at which you have the option to buy the said number of currency lots, all before the expiration date.
If the real price of the currency pair goes up and exceeds the strike price, the option is known as being ‘in the money.’ When it’s in the money, you can execute the option to buy at the lower price, then sell it back to the market for the higher price for a nice profit.
First of all, you limit your risk. It’s one of those few forex trading strategies that help you limit losses considerably. When you buy a currency option contract, you pay for it with a premium. No matter how much the currency pair that is attached to it falls, you will never lose more than the premium that you paid.
The reason this is good for short term trading is because the expiration date forces you to make it that way. If your price predictions don’t move within that time frame, you are at a loss. This is advantageous because you lose the premium, but you can just move on instead of festering over a losing trading position.
The temptation for staying in a losing position won’t be there. One of the hardest things for traders to do is cut their losses and move on to the next trade. Most likely, they will continue to lose money on that trade until they are bankrupt. At the very least, they will be missing out on other trading opportunities that would be wins.