FX Options Tutorial and Brokers
The new FX Options from IQOption combine the best of both worlds – a derivative option with binary returns that trade like spot forex positions. Here we explain what an FX option is, how to trade them and which the best FX Options brokers are.
FX Options Brokers
ESMA Compliant
These options are compliant with the ESMA regulation and available to EU traders.
Like spot FX, your entry price for the FX-Option is the price of the underlying pair at the time of your purchase.
Unlike spot FX the options come with a limited lifespan, there is an expiry, and your profits are based on a system of strike prices.
How Do FX Options Work?
This is how they work. When you pull up a chart of the FX-Option you will see a series of strikes (strike prices) to the right of the price action.
You will choose one of those strikes and the direction of the trade, whether you think prices will rise or prices will fall.
If you buy a call and price rises you can make profits after you clear a spread up to and until one of two things happens:
Expiry
The first is expiry.
If the option expires there are two possible outcomes. If the asset closes above your strike your trade is automatically closed at a profit, whatever profit is showing. If the asset closes below your strike the entire trade is a loss.
The second thing that can happen is that you decide to close the trade – yes, close the trade!
Unlike binary options the FX-Options can be closed at any time so you can lock in whatever profits or losses you are showing before the option expires.
Strike Prices
The strike prices are also important because of leverage, the further out of the money your strike price is the higher the return you can expect to receive.
The catch is that there is a window or spread to overcome that is tied to the amount of money you trade.
The break-even point is an amount equal to the amount you trade.
The deeper in the money your strike the easier it is to overcome but your profits will be smaller, the further out of the money your strike the harder it is to overcome but your profits will be larger.
Profit Bar
There is a tool to the side of the chart that shows how much profit or loss you can expect from a position at the time of expiry.
The gauge is a handy guide but can be confusing because it moves up and down with the value of your open positions and can show losses immediately after you purchase an option.
The thing to remember is that the gauge will change, and that if your option is above the strike price you will not lose the entire trade.
Limited Losses
Because you are buying contracts and not opening a spot position your losses will always be limited to the amount of money you trade.
This means that there are no short positions, if you are bullish you buy a call and if you are bearish you buy a put.
Expiry on these positions is usually about one hour but, again, that doesn’t really matter because you can buy or sell these options at any time, and even buy and sell the same option over and over again if it keeps making money.
Greeks
With the option having an expiry time, time decay becomes a factor for the pricing.
This can also be seen from the payout gauge. As an option gets nearer to expiry, the potential for price moves of a certain magnitude change. This can result in some very tempting payout percentages appearing as an option comes to close the closing.
Volatility and time decay are both in play when you trade FX Options.
IQ Option
Right now, these options are only available at IQ Option. The range of markets is limited to the 5 major forex pairs, and the expiries are set at 1 hour intervals.
As the popularity of the product grows, expect further markets to be added, and more expiry options – particularly end of day.
