The trading account minimums required by different forex option brokers change from a few thousand dollars to over fifty thousand dollars. Also, forex option brokers may need investors to trade forex options contracts having minimum notional values (contract sizes) as much as $500, 000. Last, but not least, certain types of forex option contracts can be entered into and exited anytime while other types of forex option contracts lock you in until termination or settlement. Depending on the type of forex option contract you enter, you might get stuck the wrong way with an option contract that you could not trade out of. Before trading, investors should inquire with their foreign exchange option brokers about initial trading account minimums, required contract size minimums as well as contract liquidity.
There are a number of different forex option trading products agreed to investors by forex option brokers. We believe it is extremely important for investors to understand the distinctly different risk characteristics of each one of the forex option trading products mentioned below that are offered by firms which broker forex options.
Plain Vanilla Forex Options Broker - Plain vanilla options generally make reference to standard put and call option contracts traded through an exchange (however, regarding forex option trading, plain vanilla options would refer to the standard, generic option contracts which are traded through an over-the-counter (OTC) forex dealer or clearinghouse). In simplest conditions, vanilla forex options would be defined as the buying or selling of the 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 twenty-four hours a day. Most forex option brokers and banks only broker forex options via phone. Vanilla forex options for major currencies have good liquidity and you can certainly enter the market long or short, or exit the market any period day or night.
Vanilla forex option contracts can be used in combination with one another and/or with spot forex contracts to form a basic strategy such because writing a covered call, or much more complex forex trading strategies for example butterflies, strangles, ratio spreads, synthetics, etc. Also, plain vanilla options are the basis of forex option trading strategies known as exotic options.
Exotic Foreign exchange Options Broker - First, it is important to note that there a few different forex definitions for "exotic" and we don't want anyone getting baffled. The first definition of a forex "exotic" refers to any individual currency that's 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's a derivative of a standard vanilla forex option contract.
To understand what can make an exotic forex option "exotic, " you must first understand what can make a forex option "non-vanilla. " Plain vanilla forex options have a conclusive expiration structure, payout structure and payout amount. Exotic forex option contracts may have a change in one or all the above features of a vanilla forex option. It is important to observe that exotic options, since they are often tailored to a specific's investor's requirements by an exotic forex options broker, are generally not very liquid, if.
Exotic forex options are generally traded by commercial and institutional investors instead of retail forex traders, so we won't spend too much time covering unique forex options brokers. Examples of exotic forex options would include Asian choices (average price options or "APO's"), barrier options (payout depends on whether or not the underlying reaches a particular price level or not), baskets (payout depends on more than one currency or perhaps a "basket" of currencies), binary options (the payout is cash-or-nothing if underlying doesn't reach strike price), lookback options (payout is based on maximum or minimum price reached during life from the contract), compound options (options on options with multiple strikes and exercise dates), distribute options, chooser options, packages and so on. Exotic options can be tailored to some specific trader's needs, therefore, exotic options contract types change and evolve with time to suit those ever-changing needs.
Since exotic forex options contracts are usually specifically tailored for an individual investor, most of the exotic options business in transacted over the phone through forex option brokers. There are, however, a handful of forex option brokers who offer "if touched" forex choices or "single payment" forex options contracts online whereby an investor can specify an amount they're willing to risk in exchange for a specified payout amount if the underlying price reaches a particular strike price (price level). These transactions offered by legitimate online forex brokers can be viewed as a type of "exotic" option. However, we have noticed that the premiums charged for these kinds of contracts can be higher than plain vanilla option contracts with similar strike prices and you will not sell out of the option position once you have purchased this kind of option - you can only attempt to offset the position with another risk management strategy. As a trade-off for getting to choose the dollar amount you need to risk and the payout you wish to receive, you pay a high quality and sacrifice liquidity. We would encourage investors to compare premiums before investing in such 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 you should note that depending on the type of exotic option contract, there might be little to no liquidity at all if you wanted to exit the positioning.
Firms Offering Forex Option "Betting" - A number of new firms have popped up during the last year offering forex "betting. " Though some may be legitimate, a quantity of these firms are either off-shore entities or located in some other remote control location. We generally do not consider these to be forex brokerage companies. Many do not appear to be regulated by any government agency and we strongly suggest investors perform research before investing with any forex betting firms. Invest at your own risk with one of these firms.