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5 Advantages of Forex Options Trading

  On this page you will learn about the Five major advantages of Forex Options Trading.


Many of you know about trading options (the theme of this site!), but are unsure about the profit potential of forex options trading, or simply don't have enough information about the forex options market. There are also some horror stories circulating about fortunes lost and accounts wiped out by reckless and undisciplined behavior by options traders. It is of course true that forex options trading is a risky activity, but the risk involved is not that different from the risk of online forex trading through the spot market, or trading stocks via a broker. On the other hand, there are some important advantages unique to the options market, which we would like to discusson this page.

Limited Risk
It is possible to limit your risk to a maximum amount with options. If you sell the EUR/USD pair, for example, and the price of the pair begins to rise, in theory, your losses are unlimited. However, if you buy a sell option for the EUR/USD pair, the maximum amount which you'd lose is the premium. Clearly, this is a great advantage over spot forex. By controlling your risk with options trading, you will be able to avoid those sleepless nights where fear of loss deprives you of the ability to make rational decisions.

Better pricing
No one can say if the EUR/USD pair, for example, is fairly priced in the spot market or not. There are too many models, and they are neither simple nor popular enough for establishing a generally accepted criterion for establishing the fair value of a currency pair. In the options market, however, there are some well-known and generally accepted pricing methods which usually establish the value of an options contract in a clear and concise manner. Thus, trading in the options market reduces the uncertainty involved in speculation, and traders who seek such an environment may feel better in the options market in comparison to trading the spot market.

Trading in the spot or futures market is of course a valid approach for all kinds of purposes. However, the age-old principle of profitable trading which dictates that you don't put all your eggs into the same basket suggests that a little bit of diversification is a great way of controlling your risk. Thus, traders who want to ensure that they are spreading the risk of trading to different markets have an excellent diversification channel in the options market.

Although retail forex is new and a relatively less well regulated financial field, trading on currency options has decades of long history behind it. Thus, traders who do not feel comfortable about trading forex on the spot market with retail brokers can resort to the options market for increased regulation, transparency, and oversight.

As you see, forex options trading has many unique advantages. In the end, whether you choose to trade in this market will be related to your aims and preference. Knowledge never hurts though, and you're well advised to consider all the choices that you have before making your decision.

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