The advantage of buying options is the ability to create limited risk trades and strategies without having to utilize a stop-loss order, hence you avoid stop-outs (as long your account equity supports the option buy price). Furthermore, you risk is limited but your profit is unlimited.
Call and Put options on MT4 can be used to trade currency market direction. If you expect a currency pair to rise you may buy a Call option and if you expect a pair to fall you may buy a Put.
Two things you need to consider when buying options; the strike price and the expiry date. Through buying an option you are reserving a price in the market and that reserved price is known as the strike. The value of an option depends on the market price level relative to the strike price. The more the strike can 'beat' the market the more the option is worth. Secondly, options with a longer expiry will cost more but they also give more time for your outlook to happen, this could be described as 'buying more time'.
Trade an uptrend
You would buy a Call to trade an uptrend because a Call gives the owner the right to buy a currency pair at a certain market rate. This certain rate is the strike rate. Once you are holding the option, the more the strike can 'beat' the market the more valuable your option becomes.
For example, the image below shows a weekly (w) EUR/USD Call with a strike of 1.0900. If you buy this option you will hold the right to buy EUR/USD at 1.0900 until the end of the trading week. The option costs 0.00414 (Ask price) to buy.
Note that, 0.00414 = 41.4 pips
If EUR/USD is trading above the strike rate by expiry the option will have value because your option is allowing you to buy at a better rate. Say, EUR/USD is trading at 1.1000 your strike of 1.0900 allows you to buy at a much cheaper rate (100 pips cheaper in fact!). The more the market rate rises above your strike the more valuable the Call option becomes.
When your options value is higher than the price you paid for it, you may sell it for a profit. On the other hand, if EUR/USD is trading below the strike rate at expiry, the Call option has no value and a loss is incurred. Your loss is limited to the price you initially paid for the option (in this case that is 41.4 pips).
In summary, as the market rate moves UP, above the strike rate,the call option's value increases and if the market moves DOWN, expiring below the strike, a loss is incurred. The loss is limited yet the position cannot get stopped-out. This may be useful to trade a volatile uptrend.
Trade a downtrend
You would buy a Put to trade a downtrend because a Put gives the owner the right to sell a currency pair at a strike rate. Once you are holding the option, the more the strike can 'beat' the market the more valuable your option becomes.
For example, the image below shows a weekly EUR/USD Put with a strike of 1.0800. It would cost you 0.00337 (Ask price) to hold the right to sell EUR/USD at 1.0800 until the end of the trading week.
Note that, 0.00337 = 33.7 pips
If the market rate is below the strike rate by expiry the Put option will have value because it allows you to sell at a better rate. Say,EUR/USD moved to 1.0700, you have the right to sell at the higher rate of 1.0800. The more the market falls, the more valuable the Put option becomes.
When your options value is higher than the price you paid for it, you may sell it for a profit. On the other hand, if EUR/USD is trading above the strike rate at expiry, the Put option has no value and a loss is incurred. Your loss is limited to the price you paid (in this case that is 33.7 pips).
In summary, as the market rate moves DOWN, below the strike rate,the Put option's value increases and if the market moves UP, expiring above the strike, a loss is incurred. The loss is limited yet the position cannot get stopped-out. This may be useful during a volatile downtrend.
The possibilities through buying options don't stop there, they can also be used to trade strategies such as straddle and strangles allowing investors to take advantage of increases or decrease in market volatility. These will be explained in future articles.
Editors’ Picks
EUR/USD holds firm near 1.1850 amid USD weakness
EUR/USD remains strongly bid around 1.1850 in European trading on Monday. The USD/JPY slide-led broad US Dollar weakness helps the pair build on Friday's recovery ahead of the Eurozone Sentix Investor Confidence data for February.
GBP/USD holds medium-term bullish bias above 1.3600
The GBP/USD pair trades on a softer note around 1.3605 during the early European session on Monday. Growing expectation of the Bank of England’s interest-rate cut weighs on the Pound Sterling against the Greenback.
USD/JPY falls further toward 156.00 as intervention risks dominate
The Japanese Yen is looking to build on its strong intraday move up amid speculations that authorities will step in to stem weakness in the domestic currency. In fact, Japan’s Finance Minister Satsuki Katayama stepped up intervention warnings and confirmed close coordination with the US against disorderly FX moves. This, along with some follow-through US Dollar selling, triggers an intraday USD/JPY turnaround from the 157.65 region, touched in reaction to Prime Minister Sanae Takaichi's landslide win in Sunday's election.
Editors’ Picks
EUR/USD holds firm near 1.1850 amid USD weakness
EUR/USD remains strongly bid around 1.1850 in European trading on Monday. The USD/JPY slide-led broad US Dollar weakness helps the pair build on Friday's recovery ahead of the Eurozone Sentix Investor Confidence data for February.
USD/JPY falls further toward 156.00 as intervention risks dominate
The Japanese Yen is looking to build on its strong intraday move up amid speculations that authorities will step in to stem weakness in the domestic currency. In fact, Japan’s Finance Minister Satsuki Katayama stepped up intervention warnings and confirmed close coordination with the US against disorderly FX moves. This, along with some follow-through US Dollar selling, triggers an intraday USD/JPY turnaround from the 157.65 region, touched in reaction to Prime Minister Sanae Takaichi's landslide win in Sunday's election.
Gold remains supported by China's buying and USD weakness as traders eye US data
Gold struggles to capitalize on its intraday move up and remains below the $5,100 mark heading into the European session amid mixed cues. Data released over the weekend showed that the People's Bank of China extended its buying spree for a 15th month in January. Moreover, dovish US Fed expectations and concerns about the central bank's independence drag the US Dollar lower for the second straight day, providing an additional boost to the non-yielding yellow metal.
Cardano steadies as whale selling caps recovery
Cardano (ADA) steadies at $0.27 at the time of writing on Monday after slipping more than 5% in the previous week. On-chain data indicate a bearish trend, with certain whales offloading ADA. However, the technical outlook suggests bearish momentum is weakening, raising the possibility of a short-term relief rebound if buying interest picks up.
Japanese PM Takaichi nabs unprecedented victory – US data eyed this week
I do not think I would be exaggerating to say that Japanese Prime Minister Sanae Takaichi’s snap general election gamble paid off over the weekend – and then some. This secured the Liberal Democratic Party (LDP) an unprecedented mandate just three months into her tenure.
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