A currency option allows the trader to buy or sell currency for a certain price at a certain time in the future. An ‘option’ means you can choose – you choose the price you want to buy or sell the currency and you choose the time you want to buy or sell. You make these choices before buying the option. But, an option also means you can choose if you want to buy or sell when the time arrives. You are able to decide against completing the deal if that is what you choose.
Traders choose option trading because they are uncertain about the direction of the market. They might be concerned about future changes in currency exchange rates. Option trading gives you a chance to wait until the market conditions are right for you.
Say you want to make sure of a foreign exchange rate for a period of time. It might be 30 days from today. (You can choose a date, which might be any business day up to six months from now). You establish an option deal. You decide that you will be able to buy (call) USD 10,000 and sell (put) Euro (EUR), for the next 30 days, at a certain pre-set rate that you choose (called the ‘strike’). The strike you choose is 1.0700 USD per EUR. You can either: Keep the option until maturity or Execute the option before maturity, meaning you perform the action granted to you by the option. If you keep the option until maturity, two things can happen: the EUR/USD rate is less than your strike when the deal is executed – say 1.0400 – you profit, the EUR/USD rate is more than your strike when the deal is executed – say 1.1000 – you lose your premium. The amount you get depends on the difference between the rate at the time the deal is executed and the strike you choose. If you close the deal before the maturity date, you get value for the time that remains. If you need more info on options trading, you may refer to the source below. All the best.
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