There are various ways of speculating on the exchange rate movements, but by far, the easiest and most popular way is to buy or sell a currency option. A Currency option gives the holder the right to purchase or sell a set amount of foreign currency at a pre-agreed price. Meaning you can gain from fluctuations in market prices even though you might not be aware of them until after they have happened.
Many foreign exchange brokers are now offering currency options to their customers, some even offering the opportunity to trade online. The following steps outline how you can trade forex options online. Need an online broker with excellent service? You can get it here.
Open a forex account
Before buying or selling currency options, you must first open a forex account with a broker. It is usually more straightforward than opening a trading account for shares and commodities – all that is needed is proof of identity and address, as well as an initial deposit. The minimum varies from broker to broker, but it usually starts at a few thousand dollars.
Decide whether to trade long or short
The difference between buying an option contract (long) and selling one (short) is determined by the relationship between the purchase price of the underlying asset and the strike price. If you think the market will rise, you will enter into an extended position; if you think it will fall, you will enter into a short position.
Decide how far the market will move
To do this, look at the price charts of major currency pairs, which you can view on most forex trading websites or from your broker. Note how far prices tend to move over specific timeframes – usually an hour, a day and a week – and use these as a guide when deciding how far you expect the market to move. It might help to open several positions simultaneously by buying one contract for each timeframe if unsure what direction the market is likely to take.
Calculate your return
To work out how much money you could make from speculating on currency options, multiply the number of contracts you open by the underlying asset’s price. Then multiply by how many pips you expect the market to move in your desired direction.
Wait for your trade to turn a profit
Unlike when trading stocks in Hong Kong, forex options do not expire in three months – they can be held open indefinitely. Once you have bought an options contract, you can sit back and watch it increase or decrease in value over time according to fluctuations in the underlying asset’s price.
Cash out gains when you are ready
When you are ready to sell your option contracts back, look at what other traders are doing online and check with your broker about closing your position before expiry. The same steps apply when opening an option position; however, instead of buying or selling a contract, you will be closing that position to take your gains or cut your losses.
Beware expiration dates and settlement amounts
The primary factor affecting the price of foreign currency options is time until expiration – as well as how much time has already elapsed. You should also pay close attention to settlement amounts because this will affect your return on investment (ROI). The longer the option, the more it will cost, and this means that you need to calculate further ahead than with shorter-term investments. For example, if you think that a market will move very little over the next hour, purchasing one-hour options may not be cost-effective – but they could be if you are willing to wait overnight.
Trade online on forex broker platforms
Online platforms provide multiple markets, competitive spreads on major currency pairs and the ability to enter into long or short positions in just a few clicks. It can be advantageous during trading hours when spread costs are lowest. It also means that closing your position before expiry is more straightforward than with other types of forex trading.
Keep records of your transactions
Keeping records of all your transactions is essential because you might have to prove them in future if ever audited by Hong Kong’s Inland Revenue Department (IRD). Keeping records applies to stock options and futures contracts, CFDs, and any other types of financial transactions.