FOREX Options TradingWhat do you think is the biggest and most active market on the face of the earth? The US stock market? The Chinese market? No, it is the foreign currency exchange market, or FOREX. This is a market that is active around the clock, 24 hours per day. It is where bankers, institutions and individuals trade one country’s currency for another. This market offers traders unusually large leverage, and many people are attracted to it because their returns can be magnified by the leverage. As is always the case with leveraged investments, losses can be large as well.
How can safe options traders become involved in the FOREX and currency markets? I’m going to suggest three ways for you to explore: Options on Currency ETF’s, Options on Currency Futures, and FOREX options trading. Make sure you educate yourself in each of these, determine if any of them appeal to you, and paper trade until you are comfortable putting real money on the line.
Currency ETF’s: Similar to broad-based index ETF’s, there are some ETF’s that invest in Currency and Currency Futures. Unlike the highly leveraged FOREX market, these ETF’s tend to be leveraged or mildly leveraged vehicles. Hence, they may be well-suited to many investors. As in the case of other types of ETF's, these trade on stock exchanges and can be bought and sold during the trading day. Many of these have associated options. Thus, cash-secured put selling and conservative covered calls can be constructed using these ETF’s. Companies offering currency ETF’s include Wisdom Tree, Rydex, PowerShares and Barclays. For example you could enter into safe options trades with the following Rydex CurrencyShares ETF’s, all of which have associated puts and calls: FXA (Australian Dollar), FXB (British Pound), FXC (Canadian Dollar), FXE (Euro), and FXY (Japanese Yen). Currency Futures: Of course, currency futures are traded in the futures market just like hard commodities such as corn and oil. Currency futures have associated options. Because they are futures, their margin requirements are different than for ETF’s. They can be quite compelling. Again, I refer you to the excellent book, The Complete Guide to Options Trading, by James Cordier and Michael Gross, for a detailed discussion on selling futures options.
FOREX Options Trading:
Some FOREX brokers have option products available to their customers. For example, OANDA, a FOREX broker that I use, has “box options” available. The box defines a range of prices and dates in the future that plots out as a square or rectangle on a price chart. These box options are essentially binary options, which payout a fixed sum if the box is hit or not by the price during the time specified by the box. For more information visit
OANDA.
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