http://www.theforexnittygritty.com/forex-trading/trading-currency-options
Trading Currency Options
There are two reasons for trading currency options. One is to hedge currency risk in international business. The other is speculation to take advantage of foreign exchange opportunity. In each case traders buy or sell call or puts on currency pairs. A call gives the buyer the right to purchase one currency with another but confers no obligation to do so. A put gives the buyer the right to sell one currency for another but confers no obligation to do so. Our interest in this article is in profitable currency trading in the Forex markets.
Where the Money Is
Traders make the most money in volatile markets. Trading currency in volatile markets makes profit possible and trading currency options helps limit risk. When buying puts and calls on a currency pair the trader does not need to execute the contract unless doing so is profitable. Thus he can enter into what would otherwise be somewhat risky trades with his risk limited to the cost of the options contract. Traders looking for volatile currency pairs may watch the news and they may subscribe to an alert service in looking for the most profitable pair to trade. Having a clear grasp of the fundamentals that drive currency rates is essential to picking currency pairs and deciding where and when to trade. It is as the old bank robber, Willy Sutton, said when they asked why he kept robbing banks. That’s where the money is, Willy is quoted as saying. And that is why traders look for volatile currency pairs when trading currency options.
Where the Money is, Part II
As a general rule options sellers make more money over time than options buyers. Options sellers set the prices at which they are willing to assume the risk of selling a put or a call on a given currency pair. So, the best profit over time is to simply sell options and set prices in such a way as to assure a profit over time. However, selling options entails the risk of an occasional huge loss. This is why the selling of options is largely the province of large investment houses and banks with very deep pockets.
Picking and Choosing When Trading Currency Options
An individual currency trader need not concern himself with the business of a large investment house or a trader seeking to limit risk in international business.
