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: US Dollar to remain pressured until uncertainty fog dissipates
Unimpressive European Central Bank left monetary policy unchanged for the fifth consecutive meeting. The United States first-tier employment and inflation data is scheduled for the second week of February. EUR/USD battles to remain afloat above 1.1800, sellers moving to the sidelines.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY gathers strength to near 157.50 as Takaichi’s party wins snap elections
The USD/JPY pair attracts some buyers to around 157.45 during the early Asian session on Monday. The Japanese Yen weakens against the US Dollar after Japan’s ruling Liberal Democratic Party won an outright majority in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi.
Editors’ Picks
USD/JPY gathers strength to near 157.50 as Takaichi’s party wins snap elections
The USD/JPY pair attracts some buyers to around 157.45 during the early Asian session on Monday. The Japanese Yen weakens against the US Dollar after Japan’s ruling Liberal Democratic Party won an outright majority in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi.
Gold: Volatility persists in commodity space
After losing more than 8% to end the previous week, Gold remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000. The US economic calendar will feature Nonfarm Payrolls and Consumer Price Index data for January, which could influence the market pricing of the Federal Reserve’s policy outlook and impact Gold’s performance.
AUD/USD eyes 0.7050 hurdle amid supportive fundamental backdrop
AUD/USD builds on Friday's goodish rebound from sub-0.6900 levels and kicks off the new week on a positive note, with bulls awaiting a sustained move and acceptance above mid-0.7000s before placing fresh bets. The widening RBA-Fed divergence, along with the upbeat market mood, acts as a tailwind for the risk-sensitive Aussie amid some follow-through US Dollar selling for the second straight day.
Week ahead: US NFP and CPI data to shake Fed cut bets, Japan election looms
US NFP and CPI data awaited after Warsh’s nomination as Fed chief. Yen traders lock gaze on Sunday’s snap election. UK and Eurozone Q4 GDP data also on the agenda. China CPI and PPI could reveal more weakness in domestic demand.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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