A Forex option is a financial currency agreement giving the Forex
option purchaser the right, but not the obligation, to buy or sell a
particular Forex spot contract at a particular price on or before the
expiration date. The sum the Forex option purchaser pays to the
Forex option seller for the Forex option contract rights is known as
the Forex option "premium”.
Either the buyer, or holder, of a foreign currency option has the
option to sell the foreign currency option contract before expiration,
or he or she may decide to hold the foreign currency options contract
till expiration and exercise his or her right to take a position in the
underlying spot foreign currency. The act of using the foreign
currency option and taking the subsequent underlying position in the
foreign currency spot market is called "assignment" or being
"assigned" a spot positioning.
The only initial liability of the foreign currency option purchaser is to
pay the premium to the seller up front once the foreign currency
option is initially bought. Once the premium is paid, the foreign
currency option holder has no additional liability till the foreign
currency option is either offset or runs out.
On the expiration date, the call purchaser may exercise his or her
right to purchase the underlying foreign currency spot position at the
foreign currency option's strike price, and a put holder may exercise
his or her right to trade the underlying foreign currency spot position
at the foreign currency option's strike cost. Most foreign currency
options are not exercised by the purchaser, but rather are offset in themarket prior to expiration. Foreign currency options runs out
worthless if, at the time the foreign currency option runs out, the
strike price is "out-of-the-money”. In easiest terms, a foreign currency
option is "out-of-the-money" if the underlying foreign currency spot
price is below a foreign currency call option's strike price, or the
underlying foreign currency spot price is greater than a put option's
strike price. When a foreign currency option has ran out worthless,
the foreign currency option contract itself runs out and neither the
purchaser nor the seller have any further duty to the other party.
The foreign currency option seller might likewise be called the
"writer" or "grantor" of a foreign currency option contract. The seller
of a foreign currency option is contractually bound to take the
opposite underlying foreign currency spot position if the purchaser
exercises his right. Reciprocally for the premium paid by the
purchaser, the seller assumes the risk of taking a potential adverse
position at a later point in the foreign currency spot market.
Exchanges in the Forex market occur instantaneously. Even the
expert traders and bankers are challenged to make really good and
well-informed trades. A single Forex trade ought to be done after
cautiously considering some factors. According to the expert traders,
it’s easy to trade in the Forex market but for the newbies, it might be a
bit hard. You see, there are some things that you need to consider.
Many traders lose their capital and according to statistics, these
traders make up 90% of the total number of traders in the Forex
market. The other 10% is still split into two wherein the 5% are the
breakeven traders and other 5% are those traders that attain good
results.
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