Option Trading

What is option trading?

A currency option allows the trader to buy or sell currency for a certain price at a certain time in the future. An ‘option’ means you can choose – you choose the price you want to buy or sell the currency and you choose the time you want to buy or sell. You make these choices before buying the option.

But, an option also means you can choose if you want to buy or sell when the time arrives. You are able to decide against completing the deal if that is what you choose.

What is a premium?

A premium in the Forex market makes the option deal possible. The premium is the price the trader pays to the broker to establish the option deal.


Paying the premium allows you to keep the option until its maturity date, or to sell it at any time before its maturity. The maturity date is the date your deal is settled.

Why choose option trading?

Traders choose option trading because they are uncertain about the direction of the market. They might be concerned about future changes in currency exchange rates. Option trading gives you a chance to wait until the market conditions are right for you.

How does it work?

Say you want to make sure of a foreign exchange rate for a period of time. It might be 30 days from today. (You can choose a date, which might be any business day up to six months from now).

You establish an option deal. You decide that you will be able to buy (call) USD 10,000 and sell (put) Euro (EUR), for the next 30 days, at a certain pre-set rate that you choose (called the ‘strike’). The strike you choose is 1.0700 USD per EUR.

You can either:
Keep the option until maturity
Execute the option before maturity, meaning you perform the action granted to you by the option.
If you keep the option until maturity, two things can happen:
the EUR/USD rate is less than your strike when the deal is executed – say 1.0400 - you profit
the EUR/USD rate is more than your strike when the deal is executed – say 1.1000 – you lose your premium
The amount you get depends on the difference between the rate at the time the deal is executed and the strike you choose. If you close the deal before the maturity date, you get value for the time that remains.