Forex Options / Currency Options

To explain Forex Options, it’s important to explain what an option is. An option is a contract which gives the buyer (known as the owner) the right, but not the obligation, to buy or sell an underlying asset at a fixed price within a specified time frame.

An underlying asset could be currencies, stocks, commodities and indices. It is the item which is being traded. This fixed price is the price at which an asset is bought or sold at – in currency option trading it is known as the strike price.

There are two types of option strategies: Call and Put.

Stock Options

A stock is the value of a company’s assets and profits. It shows what the company is worth were they to sell off everything they own. For example Marks and Spencer, Google and Citigroup, each have stock which represents their value in the market place.

So, a stock option is when an owner either buys (in a call option) or sells (in a put option) the stock of a particular company. For example, Owner X may believe that the performance of Company Y is improving and therefore may decide to buy stocks (call option) in Company Y, so that he can profit from the rising price of the company’s stocks. If the stocks of Company Y succeed in increasing, then Owner X will profit from buying the stock earlier at a lower price.