generic-trading - FinanceFeeds

When you think of trading, there are a variety of different strategies you can use to make money.

One of those strategies is called a ‘currency call option’. When you purchase a call option on a currency pair with the expectation that the exchange rate will move in your favour, you could use a ‘currency put option’, which is the opposite. 

What is a currency call option, and what is a currency put option?

A currency call option is a contract that gives the holder the right to buy a particular currency at a specified price within a specific period. A currency put option is a contract that gives the holder the right to sell a certain amount of currency at a specified price within a specific period.

Call and put options are used by investors to speculate on the future direction of exchange rates. For example, if investors believe that the EUR/USD exchange rate will rise next month, they may buy a EUR/USD call option. If the exchange rate rises, they will make a profit; if it falls, they will lose money.

Put options work oppositely, so an investor who believes that the EUR/USD exchange rate will fall in the next month may buy a EUR/USD put option. Again, if their prediction is correct, they will make money; if not, they will lose money.

The benefits of a currency call option

Investors typically use call options to hedge against currency risk or speculate on a currency pair’s future direction. There are several benefits associated with currency call options:

  • They offer flexibility, as the holder can choose whether or not to exercise their option at expiration.
  • They provide limited downside protection, as the holder’s loss is limited to the premium paid for the option.
  • Call options offer leverage, as a small move in the underlying currency can result in a significant profit for the option holder.

For these reasons, currency call options are a popular tool for managing currency risk and speculating on future exchange rates.

The benefits of a currency put option

Put options can be used to speculate on the market’s future direction. If an investor believes that the value of a currency will fall, they can buy a put option to make a profit from the price difference. There are some disadvantages to using currency put options. The premium paid for the option is non-refundable, even if the option is never exercised. 

In addition, there is always the risk that the seller will not be able to deliver on their obligations under the contract. Nevertheless, currency put options can be a valuable tool for managing risk and realising profits in the forex market.

Examples of each type of option in action

A currency put option gives the holder the right, but not the obligation, to sell an amount of currency at a set price within a specific period. For example, imagine that you have a currency put option with a strike price of 1.20, and the current exchange rate is 1.10. If the exchange rate falls to 1.05 within the specified time, you can exercise your option to sell your currency at 1.20, regardless of the current market price.

A currency call option gives the holder the right, but not the obligation, to buy an amount of currency at a set price within a specific period. For example, imagine that you have a currency call option with a strike price of 1.20, and the current exchange rate is 1.10. If the exchange rate rises to 1.25 within the specified period, you can exercise your option to buy your currency at 1.20, regardless of the current market price.

Which type of option is right for you

If you think that the value of a currency will go down, then a put option is likely to be more beneficial, and this is because you will be able to sell the currency at a higher price than it is currently worth. On the other hand, if you think that the value of a currency will go up, then a call option may be more beneficial, and it is because you will be able to buy the currency at a lower price than it is currently worth.

Of course, there is no guarantee that your prediction will be correct. However, by carefully considering the current market conditions and using your best judgement, you can increase your chances of making a profitable trade.

Browse this site for more info on forex trading pairs available in the UK.