Philip retired from investment banking to write. To date he has written 9 books on trading forex, 3 short stories, and one poetry book. A currency option or as it is sometimes called an FX option, is a foreign exchange option, and is financial instrument known as a derivative.

Strangle (options) - Wikipedia

The buyer of the option has the right but not the obligation to buy a call option or sell a put option a currency in exchange for another currency at an agreed upon price exchange rate on a specific date in the future. For this privilege the option buyer has to pay a premium to the seller of the option. The seller of the option has the obligation to sell the option whenever it is exercised. A long call is an option where the buyer is hoping that the currency will get stronger in the future.

The premium the buyer pays is 25 pips per Euro to the option seller. A pip is the least amount the rate can change for a currency pair. So now you have purchased your call option and you wait while watching the market.

You know that to break even on your option the exchange rate needs to reach 1. If when the option expires the market spot rate is below the option break even price of 1. Whereas, if the market spot price is above the break even price at say 1.

The seller or writer of the long call option has an unlimited risk less the premium received. A long put is an option where the buyer is hoping that the currency will get weaker in the future.

The premium the buyer pays is 50 pips per Euro to the option seller. You know that to break even on your option the exchange rate needs to fall to 1. If when the option expires the market spot rate is above the option break even price of 1. Whereas, if the market spot price is below the break even price at 1.

FX option structures: Call spread, put spread, straddle, strangle

The seller or writer of the long put option like the seller of the long call option, has an unlimited risk less the premium received. A short call is where a writer or seller of an option is the counter-party to a buyer of a long call currency option.

Unlike the option holder buyer who has the right but not the obligation to buy a currency, the option writer has the obligation to sell a currency if the option holder decides to exercise the option.

If this becomes the case the option seller will have a profit equal to the premium received. If the option is exercised with a spot price above 1. If the spot price is anywhere above 1. A short put is the exact opposite of a short call, thus the writer or seller of an option is the counter-party to a buyer of a long put currency option. Again, unlike the option holder buyer who has the right but not the obligation to sell a currency, the option writer in this case has the obligation to buy a currency if the option holder decides to exercise the option.

If the spot price at expiry is at or above the strike price of 1. If the option is exercised with a spot price below 1. If the spot price is anywhere below 1.

The major difference between American style options and European style options is the expiry date. A buyer of an American style option can exercise the option on any day from the initiation date to the expiry date. Whereas the buyer of a European style option can only exercise the option on the actual expiry date.

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Straddle - Wikipedia

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Currency Options Trading - Payoff Diagrams Explained Updated on January 19, What is a Currency Option A currency option or as it is sometimes called an FX option, is a foreign exchange option, and is financial instrument known as a derivative.

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Long Call Pay Off Diagram A long call is an option where the buyer is hoping that the currency will get stronger in the future. Long Put Pay Off Diagram A long put is an option where the buyer is hoping that the currency will get weaker in the future. Short Call Option A short call is where a writer or seller of an option is the counter-party to a buyer of a long call currency option.

Pay Off Diagram Short Put A short put is the exact opposite of a short call, thus the writer or seller of an option is the counter-party to a buyer of a long put currency option. American Style Options versus European Style Options The major difference between American style options and European style options is the expiry date. How good is this article? Books, Literature, and Writing. Games, Toys, and Hobbies. HubPages Tutorials and Community. Politics and Social Issues.