Options

A foreign exchange option (commonly referred to as just FX option or currency option) is a financial instrument where in the owner has the right but is not obligated to exchange money in one currency into another currency at a pre-agreed exchange rate on a specific date.

The FX options market is the largest and most liquid market for options of any kind in the world. Most of the FX options volume is traded OTC (over the counter).

There are two types of traditional options offered by brokers:

American-style – This type of option can be exercised at any point up until expiration.

European-style – This type of option can be exercised only at the time of expiration.

One advantage of traditional options is that the premiums are lower than SPOT options. Also, because (American) traditional options can be purchased and sold before expiration, they are more flexibile. But, traditional options are more difficult to set and execute than SPOT options.

This is the way SPOT options work: the trader assigns a scenario (for example, "EUR/USD will break 1.3000 in 12 days"), aquires a premium quote, and then receives a payout if the scenario takes place. Essentially, SPOT automatically converts your option to cash when your option trade is profitable, giving you a payout.

SPOT options are easy to trade: it's a matter of entering the scenario and letting it play out. If you are right, you receive cash into your account. If you are incorrect, your loss is just your premium. Another advantage of SPOT options is the choice of many different scenarios, permitting the trader to choose exactly what they think is going to happen.

One disadvantage of SPOT options, however, is their higher premiums. On average, SPOT option premiums are more costly than standard options.