Forex option brokers can
generally be divided into two separate categories: forex brokers who offer
online forex option trading platforms and forex brokers who only broker forex
option trading via telephone trades placed through a dealing/brokerage desk. A
few forex option brokers offer both online forex option trading as well a
dealing/brokerage desk for investors who prefer to place orders through a live
forex option broker.
The trading account minimums
required by different forex option brokers vary from a few thousand dollars to
over fifty thousand dollars. Also, forex option brokers may require investors
to trade forex options contracts having minimum notional values (contract
sizes) up to $500,000. Last, but not least, certain types of forex option contracts
can be entered into and exited at any time while other types of forex option
contracts lock you in until expiration or settlement.
Depending on the type of
forex option contract you enter into, you might get stuck the wrong way with an
option contract that you can not trade out of. Before trading, investors should
inquire with their forex option brokers about initial trading account minimums,
required contract size minimums and contract liquidity.
There are a number of different
forex option trading products offered to investors by forex option brokers. We
believe it is extremely important for investors to understand the distinctly
different risk characteristics of each of the forex option trading products
mentioned below that are offered by firms that broker forex options.
Plain Vanilla Forex Options
Broker - Plain vanilla options generally refer to standard put and call option
contracts traded through an exchange (however, in the case of forex option
trading, plain vanilla options would refer to the standard, generic option
contracts that are traded through an over-the-counter (OTC) forex dealer or
clearinghouse). In simplest terms, vanilla forex options would be defined as
the buying or selling of a standard forex call option contract or forex put option
contract.
There are only a few forex
option broker/dealers who offer plain vanilla forex options online with
real-time streaming quotes 24 hours a day. Most forex option brokers and banks
only broker forex options via telephone. Vanilla forex options for major
currencies have good liquidity and you can easily enter the market long or
short, or exit the market any time day or night.
Vanilla forex option contracts
can be used in combination with each other and/or with spot forex contracts to
form a basic strategy such as writing a covered call, or much more complex
forex trading strategies such as butterflies, strangles, ratio spreads,
synthetics, etc. Also, plain vanilla options are often the basis of forex
option trading strategies known as exotic options.
Exotic Forex Options Broker -
First, it is important to note that there a couple of different forex
definitions for "exotic" and we don't want anyone getting confused.
The first definition of a forex "exotic" refers to any individual currency
that is less broadly traded than the major currencies. The second forex
definition for "exotic" is the one we refer to on this website - a
forex option contract (trading strategy) that is a derivative of a standard
vanilla forex option contract.
To understand what makes an
exotic forex option "exotic," you must first understand what makes a
forex option "non-vanilla." Plain vanilla forex options have a
definitive expiration structure, payout structure and payout amount. Exotic
forex option contracts may have a change in one or all of the above features of
a vanilla forex option. It is important to note that exotic options, since they
are often tailored to a specific's investor's needs by an exotic forex options
broker, are generally not very liquid, if at all.
Exotic forex options are
generally traded by commercial and institutional investors rather than retail
forex traders, so we won't spend too much time covering exotic forex options
brokers. Examples of exotic forex options would include Asian options (average
price options or "APO's"), barrier options (payout depends on whether
or not the underlying reaches a certain price level or not), baskets (payout
depends on more than one currency or a "basket" of currencies),
binary options (the payout is cash-or-nothing if underlying does not reach
strike price), lookback options (payout is based on maximum or minimum price
reached during life of the contract), compound options (options on options with
multiple strikes and exercise dates), spread options, chooser options, packages
and so on. Exotic options can be tailored to a specific trader's needs,
therefore, exotic options contract types change and evolve over time to suit
those ever-changing needs.
Since exotic forex options
contracts are usually specifically tailored to an individual investor, most of
the exotic options business in transacted over the telephone through forex
option brokers. There are, however, a handful of forex option brokers who offer
"if touched" forex options or "single payment" forex
options contracts online whereby an investor can specify an amount he or she is
willing to risk in exchange for a specified payout amount if the underlying
price reaches a certain strike price (price level).
These transactions offered
by legitimate online forex brokers can be considered a type of
"exotic" option. However, we have noticed that the premiums charged
for these types of contracts can be higher than plain vanilla option contracts
with similar strike prices and you can not sell out of the option position once
you have purchased this type of option - you can only attempt to offset the
position with a separate risk management strategy.
As a trade-off for getting
to choose the dollar amount you want to risk and the payout you wish to
receive, you pay a premium and sacrifice liquidity. We would encourage
investors to compare premiums before investing in these kinds of options and
also make sure the brokerage firm is reputable.
Again, it is fairly easy and
liquid to enter into an exotic forex option contract but it is important to
note that depending on the type of exotic option contract, there may be little
to no liquidity at all if you wanted to exit the position.
Firms Offering Forex Option
"Betting" - A number of new firms have popped up over the last year
offering forex "betting." Though some may be legitimate, a number of
these firms are either off-shore entities or located in some other remote
location. We generally do not consider these to be forex brokerage firms.
Many
do not appear to be regulated by any government agency and we strongly suggest
investors perform due diligence before investing with any forex betting firms.
Invest at your own risk with these firms.
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