Trading Call Options on MT4
|This educational lesson explains how Call options are traded on the popular MT4 platform.
Buying or selling Call Options
A Call option price rises when the underlying market, such as a currency pair:
- Trends upwards
- Increases in expected volatility
When Buying a Call, there is unlimited profit potential and the loss is limited to the price paid at open. Note: Time value is against you (more details below).
This may be a useful position in any of the following scenarios:
- Placing a trade on a bullish uptrend
- Placing a limited risk trade on event driven market moves to benefit from a volatile uptrend without having to utilize a stop-loss order
- Hedging a short position in the underlying asset
A Call option price falls when the underlying market:
- Trends downwards
- Decreases in expected volatility
When Selling a Call, the profit potential is limited and the loss is unlimited. Note: Time value is in your favor (more details below).
This may be a useful position in any of the following scenarios:
- Placing a trade on a downtrend
- Ahead of times of market stagnation – no market news and/or a decrease in expected volatility
- Hedging a long position in the underlying asset
Expiry and Time Value
All option trades have an expiry date. You may choose to hold your position until expiry or close before. Currently there are two expiries available in MT4: Daily (d) and Weekly (w). Daily options expire every working day and Weekly options expire on the last working day of the week.
The key factors in determining an options value are:
1. The underlying market rates position with respect to the strike rate of the option (intrinsic value)
2. The marketplace's consensus on volatility over the duration of the option contract
3. Time left until expiry
Options with longer expiries, compared with equivalent contracts, are worth more. For each day that passes as an option gets closer to expiry, its value declines. This is known as time decay, which is good if you have sold the option but bad if you have bought the option.
How to Buy and Sell Options in MT4
Call options are labeled C# followed by the currency pair. For example, the image below shows a weekly EURUSD Call option. To check the strike level and expiry date & time, hover your mouse over the symbol and a trade details box will appear.
To open the order and trade it, double click the symbol from the Market Watch. In the Order Ticket, details of the Call option are shown. They include the strike rate and expiry date & time. You can alter the Volume (in lots) and Order Type. For example, the Order ticket below shows the weekly EURUSD Call has the strike rate 1.06060. It costs 0.00493 (49.3 pips) to buy this option and you will receive 0.00404 (40.4 pips) if you sell the option.
Once you click Sell or Buy, the Call option trade is opened and can be viewed in your Terminal Window under the ‘Trade’ Tab. The trade can be closed manually at any time before its expiry.
Options can be used as hedging instruments against their underlying assets in MT4, which I will discuss in a later Lesson.
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