Currency options definition

What is a currency option?

A currency option is a type of options contract that gives the holder the right, but not the obligation, to buy or sell a currency pair at a given price before a set time of expiry. To get this right, the holder of the option pays a premium to the seller (known as the option’s writer).

How do currency options work?

There are two types of currency option available: calls and puts. A call option gives the holder the right to buy a currency pair at the strike price before the expiry date, while a put option gives the trader the right to sell a currency pair at the strike price before the expiry date. 

If, at the time of expiry, the market price of your chosen pair is above (calls) or below (puts) the strike price of your option, you can choose to exercise it and buy (calls) or sell (puts) the currency for a better price than what is currently available on the market. But if this never transpires, you can let your option expire and only lose the premium that you paid for the option in the first place. 

Why trade currency options?

Currency options are a popular way for forex traders protect against loss and speculate for profit. Buying an option to sell a currency pair that you have an existing long position on ensures that if its price falls, you can limit your losses by exercising your option and selling at a more favourable price. If its prices rises you can simply let the option expire.

Alternatively, if you don’t have an existing position on a currency pair but expect its price in the near future, you can buy a call option and lock in a guaranteed price to buy that pair. As long as the pair’s price rises above the strike by more than what you paid as the premium, your option will earn a profit. 

Currency options example

You believe that the price of the euro will rise against the US dollar, so decide to purchase a currency call option with a strike price of 1.3000 and an expiry at the end of the month. 

If the price of EUR/USD is below 1.3000 on the expiry date, the option expires worthless and you would only lose the premium paid.

On the other hand, if EUR/USD increases to 1.4000, then you can exercise the option and buy the currency for 1.3000, lower than its current market price. 

With IG

You can trade currency options with us using both CFDs and spread bets, as well as speculating on the price movements of FX pairs themselves.

Find out more about options trading.

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