Binary Forex options trading: how to trade on currency pairs

Many traders think of the stock market when they hear about binary options. However, the Forex also offers retail traders great opportunities to make some high returns. Binary Forex options trading allows you to limit risk and see profit in little as one hour. Here we’ll discuss what Forex binary options are, how they are used and which strategies you can use to profit.

Let’s begin with a short explanation about the Forex before we get into binary Forex options trading. A global, decentralized over-the-counter financial market for the trading of currencies, the Forex, or Foreign Exchange Market, allows banks and other institutions to easily buy and sell foreign currencies. Financial centers around the world act as hubs for trading between a large variety of buyers and sellers day and night, except for weekends. For example, it enables an American company to import products from South Africa and pay in Rand even though its income is in dollars.

The exchange rates of currencies on the Forex fluctuate (floating currencies) according to the market. A currency’s value rises if the market demand for it surpasses the available supply and drops in the opposite scenario. This is where binary Forex options trading comes in – a new type of investment that allows the average person to be active on the Forex. Binary Forex options trading via an online platform offers you a tool to purchase Call and Put positions on chief currency pairs like the US Dollar against the Japanese Yen and the US Dollar against the Euro, among many others.

Online Binary Forex options trading enables the middle or amateur investor the chance to trade on the Forex with smaller amounts of capital but with the same high yield returns as any other method. Plus, returns can be collected in just one hour. What you are doing with this form of trading is attempting to predict whether or not one currency in a pair will trend up or down against the other.

Let’s look at the Forex options trading available at online binary options trading platform anyoption.com – a leader and pioneer in the field. They offer trading on the following pairs:

• Australian Dollar (AUD)/US Dollar (USD)

• Euro (EUR)/British Pound (GBP)

• Euro (EUR)/Japanese Yen (JPY)

• British Pound (GBP)/ Japanese Yen (JPY)

• New Zealand Dollar (NZD)/US Dollar (USD)

• Euro (EUR)/US Dollar (USD)
• US Dollar (USD)/British Pound (GBP)
• US Dollar (USD)/Japanese Yen (JPY)
• US Dollar (USD)/ South African (RAND)
• US Dollar (USD)/Canadian Dollar (CAD)
• US Dollar (USD)/ Swiss Franc (CHF)

Each Forex options trading currency pair has an expiry level calculation. Let’s look at AUD/USD as an example. This currency pair, like most, has hourly, end of day, end of week and end of month expiry times. The expiry formula is the sum of the ASK value and the BID value, divided by two [(ASK+BID)/2]. The result is rounded up if the fifth decimal digit is 5 or higher and rounded down if the last decimal digit is 4 or lower.

Let’s say you have $2,000 in your binary options trading account and you decide to take up Forex options trading on the AUD/USD. Let’s use the recent rate of 0.91721 for this example and a 70% return rate. Earlier this week, you read that the AUD/USD fell from 0.9206 to 0.9145 and settled under 0.9170 after the Australian government released some disappointing growth figures. So you predict that the AUD will continue to drop against the US dollar. You purchase a Put option for $500 with a one hour expiration. If your prediction is right and the price falls at the end of the hour, even if only by 0.001 below the strike price, you will collect $850 ($350 in returns plus your initial investment). So in the end, a $500 trade could easily earn you $350 in profits and you could repeat the same binary options trade a few times in one day.

Let’s begin this binary options post with a short explanation about the Forex. The Forex, or Foreign Exchange Market, allows banks and other institutions to easily buy and sell foreign currencies. The main function of the Forex is to facilitate international trade and investment by helping businesses convert one currency to another. For example, it enables a European company to import products from Japan and pay in Yen even though the business’s income is in Euros. So now you are asking yourself, how does this relate to binary options trading? Read on…

Currencies on the Forex are floating currencies, which means that their exchange rates fluctuate according to the Forex market. The value of a currency rises whenever the demand for that currency becomes greater than the available supply and will drop when the demand is less than the available supply. This is where we get to binary options trading on the Forex. In very recent years, this new kind of digital options trading has become the leading investment choice for the average person who wants to participate in the Forex.

Binary options trading, through an online binary options platform, offers traders the opportunity to call and put positions on major currency pairs such as the US Dollar against the Japanese Yen and the US Dollar against the Euro, among many others. With binary options, or fixed return options, you are forecasting whether one currency will trend up or down against another currency.

Online binary options platforms offer individual traders the chance to participate in the Forex using lower capital amounts but with the same high yield returns as any other trading method. Binary options trading payout can be hourly, daily or monthly. Easy call and put binary options purchases are made with a simple click. You can open an online account and trade binary options for just $100.

So let’s take a look at how binary options trading on the Forex really works. You have $1,000 in your binary options trading account and you decide to trade digital options on the Forex currency pair EUR/USD. For this binary options example, we’ll assume that the price of the EUR/USD is at 1.43483. According to some finance news you read about earlier in the day, your feeling is that the Euro is climbing against the Dollar.

You decide to buy a $100 call option for the EUR/USD pair with a 1-hour expiration. If your prediction is correct and the price rises at the end of the hour, even if only by 0.001 above the price you purchased the call option for (also called the strike price), you would get as much as a 70% return on your $100 investment in binary options. So in the end, a mere $100 trade could easily earn you $70 in profits and you could repeat the same binary options trade a few times in one day.

The most fascinating and beneficial thing about Forex binary options trading is that, unlike other forms of trading, you only have to forecast the direction in which the currency will move and even the tiniest shift in foreign exchange will grant you the expected returns. Like in the example above, you took home $70 for 0.001 points of variation.

Now that’s definitely a successful digital options trade that I’m sure you wouldn’t mind repeating. Plus you can call or put for as little as $30 and there is no commission on online binary options sites. Binary options trading also offers a much more stable trade because you know what your fixed return options are in advance and some online binary options platforms offer a 15% return on digital options that expire out-of-the-money.

© 2009 – 2010, Binary Options. All rights reserved.

Currency rates are represented relative to one another and are quoted in pairs e.g. USD/CHF = 1.06
Whichever currency is quoted first, is known as the ‘base’ and it is always written has a value of 1. The second number is the ‘quote’ currency and it represents the price for 1 unit of the base currency i.e. how much of one currency is needed to buy a quantity of the other. In the example above, it costs 1.06820 Swiss francs to buy 1 US dollar.

Where forex options  trading becomes more interesting, is when the strength of currencies begins to change relative to one another. Continuing with the same example, there are two possible scenarios:
1)Or the US dollar becomes stronger so the quote currency rises e.g. USD/CHF = 1.07 – therefore it will take more Swiss francs to buy 1 dollar (or for each 1 US dollar, a buyer will receive more Swiss francs)
2)Or the US dollar weakens and the quote currency decreases e.g. USD/CHF =1.05  – therefore it costs less in Swiss francs to buy one US dollar (or for each US dollar you will receive less Swiss francs)

How does this generate forex trading? Different parties, be they financial institutions or individuals, buy a quantity of one currency in exchange for buying a quantity of a different currency. They speculate on the direction that the base currency will move in. As the value of the currencies fluctuate, forex trading takes place to take advantage of the change in price.

For example, if there is a currency pair EUR/GBP=0.876, then a trader may spend 100euro and get £87.60. If the euro weakens, say EUR/GBP=0.567 then the buyer can buy back his euros and receive 154.5€ back in return. He would have made a 54.50€ profit from his original investment.

Now it’s important to understand how this relates to forex option trading. A forex option is a contract, where a buyer has the right, but not the obligation, to buy or sell a currency at a set price within a specified time frame. In this respect, forex option trading is different from traditional forex trading as explained above.  Traditional forex trading is when a buyer purchases or sells actual currencies. However, in forex option trading, the owner is buying the option not the currency i.e. they are entering into a contract to buy or sell currencies at a set price within a specified time frame.

Moreover, forex option is a type of binary option which means that all possible outcomes are determined when the contract is made. Whereas in our above example, the amount of profit gained in the trade was relative to the magnitude that the currency fluctuated by, in forex option trading, the amount is determined from the onset of the contract.  For example, an owner may buy a Put option (see Options Trading) for £100, expiring at the end of the day, for a return of 71% on the currency pair USD/CHF currently at 1.01234.
If at the end of the day, the USD rises in value and ends up at 1.01235 or above, then the option has expired in-the-money and the owner will receive £171. He will receive the full 71% payout, regardless that the stock only moved 0.00001 points. This demonstrates the difference between trading forex options to traditional forex trading.

source: Forex Options Trading

In traditional forex trading (or currency trading) actual currencies are bought and sold. However, in forex options trading, the buyer purchases the option not the currency i.e. they are entering into a contract to buy currencies at a fixed price within a pre-determined time frame.

A forex option is a type of binary option which means both outcomes are realized when the contract is created. If the potential gain and the potential loss from the trade are known from the onset, then it makes the trade totally transparent.

In a binary option trade there are only two possible outcomes: or the option expires in-the-money and the buyer receives a fixed amount of cash; or the option expires out-of-the-money and the buyer receives nothing. However, if forex option trading is carried out on the anyoption™ platform, an option expires out-of-the-money, then a buyer receives a 15% back of his initial online investment.

In forex option trading the underlying asset being traded is a currency pair e.g. EUR/GBP, AUD/USD, USD/JPY, GBP/JPY plus many more.

When placing an online investment, the result is independent of the magnitude by which the price change of the currencies relative to one another. For example, a buyer may purchase a call option for ?100 on USD/JPY currently at 97.1563, with an expiry time of the end of the week, for a return of 70%.

If at the end of the week, the currency pair ends at 97.1564 then the option has expired in-the-money and the owner will receive ?170. Even though the stock has only moved 0.001 points, they will still receive the full 70% payout. This makes forex option trading an attractive method of trading for many new investors.

Once an exclusive industry, forex option trading is now available to everyone. Since all risks are known from the onset and due to the comfort of online trading, many buyers are turning to online investments, specifically option trading, to purchase their trades.

source: Forex Options Trading

Note: the owner is buying the option and not the currency itself

Step 1:

Select the currency pair which you would like to trade on e.g. USD/EUR, GBP/JPY

Step 2:

Decide if you want to make a call option or a put option. If you buy a call option then you predict that the rate of the currency pair will increase. If you buy a put option then you predict that the rate of the currency pair will decrease.

Step 3:

Choose your expiry date – do you want the option to expire at the end of the nearest hour or at the end of the day, week or month?

Step 4:

Enter investment amount – decide how much you would like to invest in this option.

Step 5:

Wait for the expiry – the expiry level of your chosen currency pair at the selected expiry time and date will be displayed in the trading box

Step 6:
To begin trading, you must have opened an account at anyoption.com.

anyoption™ is a new binary option trading platform available for private and institutional investors worldwide. Our option trading platform is 100% web based, and does not require software download or any other previous trading experience.

anyoption™ pricing and execution modules set up a new standard in the online trading market: the interface is self explanatory and easy to use, the range of products we offer options on is incomparable and the speed and accuracy of settlements is flawless. We use the most advanced and stable technologies to assure your safety and satisfaction.

source: How to understand Forex Options Trading?

Currency values fluctuate, enabling forex trading to take place. This is when a trader pre-empts the direction that a currency will go in, to hopefully yield high returns. If a quantity of a currency is bought at a set price and its value increases, then the trader can sell the currency at a later date for the new higher price and profit from the difference. A forex trader’s goal will be to gain from foreign currency movement.

Currency trading is sensitive to economic and political factors, resulting in a forever unpredictable market. Hence the potential for capital gains can be huge, if a currency is traded wisely.

How are the rates of currencies represented?
Currency rates are represented relative to one another i.e. how much of one currency is needed to buy another.

They are quoted in pairs.
For example, USD/EUR = 0.7037. This means that it costs 0.7037 Euros to buy 1 US dollar.
The first currency, in this case the US dollar, is known as the ‘base’ and it is always written first and with a value of 1. The second number is the ‘quote’ currency and it shows the price for 1 unit of the base currency.
Forex trading becomes more interesting as the strength of currencies begin to change. In our example above, if the US dollar becomes stronger, then the quote currency rises, since it will take more Euros to buy 1 dollar, or alternatively, for each 1 US dollar, a trader will receive more Euros.
Similarly, if the US dollar weakens, then the quote currency goes down, and it costs less in Euros to buy one US dollar, or for each US dollar you will receive less Euros.

What does this mean for the average person on the street?
This could affect a person is several ways. Take the pair USD/EUR where the Euro applies to someone living in France:
A strong US dollar means that a Frenchman will find it more expensive to buy US imports since each dollar’s worth of goods will cost more Euros that it did previously. Similarly, an American travelling to France will find it ‘cheaper’, since for every dollar that they exchange, they will get more Euros in return and will therefore have more Euros to spend for what they may have received when the US dollar was weaker (i.e. when the ‘quote’ currency was lower)

source: Forex Trading

Forex options trading is different from regular forex trading. When an owner is buying or selling actual currencies, this is known as forex trading or currency trading. However, in forex option trading, the owner is buying the option not the currency i.e. they are entering into a contract to buy or sell currencies at a fixed price within a specified time frame.

A forex option is a type of binary option which means that the payout is determined when the contract is created i.e. the potential gain and the potential loss from the trade is known from the offset. There are only two possible outcomes: or the option expires in-the-money and the owner receives a fixed amount of cash; or the option expires out-of-the-money and the owner receives nothing. However, if forex option trading is carried out with anyoption™, an owner receives 15% back if his option expires out-of-the-money.

In forex options the underlying asset being traded is a currency pair – hence why they are also called currency options. These could take on numerous possibilities: EUR/GBP, AUD/USD, USD/JPY, GBP/JPY and more.

Receiving a payment when trading forex options is independent of the magnitude by which the price of the currency moves. For example, an owner may buy a call option for £100, expiring at the end of the day, for a return of 70% on the currency pair USD/EUR currently at 0.7037.

If at the end of the day, the currency pair ends at 0.7041 then the option has expired in-the-money and the owner will receive £170. They receive the full 70% payout, regardless that the stock only moved 0.04 points. This demonstrates the relative simplicity of trading forex options.

Over the past 2 decades the forex option trading market has exploded, with individuals entering a previously elite industry. They understand how learning a small amount about different currencies can lead to potentially huge profits with all risks being calculable in advance.

source: Forex Options Trading

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.

In a call option, the owner may buy a quantity of an underlying asset at the strike price within a specified time frame.

The buyer of a call option believes the market price of the asset will rise above the strike price. If this happens, then the option (or contract) allows the owner to buy the asset at the strike price which is lower than its current price. This means the asset can be bought below its market value and the owner can profit from the difference.

In a put option, the owner may sell a quantity of an underlying asset at the strike price within a specified time frame.

The buyer of a put option believes the market price of the asset will fall below the strike price. If this happens, then the option allows the owner to sell the asset at the strike price which is higher than its current price. This means the asset can be bought below its market value and the owner can profit from the difference.

There are several benefits of forex option trading which is why many investors favor it over other options:

the risk is limited to the amount purchased in the option an investor can pay less money to enter into a deal and the possibility of profiting is high the risk is known from the offset, since the maximum an investor can lose is the money he deposited for the trade.

However, once an option has been bought, it cannot be sold so the decision to trade is final. Also, it is difficult to predict the market so an investor must be careful and considerate when trading options.

Initially, currency trading was only accessible to wealthier customers who could afford to trade with large quantities of currencies. However, due to the introduction of online trading platforms, such as anyoption™, profiting from currency option trading, even for small investors, is possible and achievable. Online option trading also enables people to invest whilst in the comfort of their own home. They can trade from wherever they are geographically, without the need for a broker.

source: Forex Options / Currency Options

What is forex trading?
Forex trading is when a person or institution buys and sells actual currencies, depending on the rate of the quote currency relative to the base currency (see below).

What is forex?
When you go on holiday and buy the local currency, you will probably spend your time converting the currency in your head back into your home currency so that you can decide whether you are getting a ‘good deal’ or not. This is the exchange rate or forex rate – an acronym for Forex Exchange. This rate will affect your ‘good deal’ outcome.

What is forex option trading?
Forex option trading is when an investor enters into a contract to buy or sell the currency at a fixed price at a set time in the future. They are not buying the currencies themselves but rather they are buying a contract which is affected by the currencies’ performance. A forex options trading investor can easily become a successful trader by gaining knowledge of different currencies and their likely movements relative to one another.

How is it represented?
Forex is represented in pairs e.g. USD/EUR, GBP/JPY. The first currency is known as the ‘base’ currency and has a value of 1. The second currency is known as the ‘quote’ currency. Its value shows how much of the quote currency is needed to buy one unit of the base currency.
Here’s an example: you are from Italy and holidaying in the USA so your currency pair is USD/EUR = 1.42958 which means that it costs 1.42958 Euros to buy 1 US dollar. If the USD strengthens then the number 1.42958 will increase, so you will need more Euros to buy one USD. Similarly, if the USD weakens then the number 1.42958 will decrease and it will take less Euros to buy one USD.

What does this mean for me?
In the example of your holiday, if you were in the USA and the USD weakened then you would benefit by receiving more dollars for your Euros.

How can I profit from forex?
To profit from forex you can purchase a forex binary option. You can monitor a currency pair and purchase a forex binary option based on which currency you think will grow stronger. If you think the quote currency will go stronger then you can purchase a Call forex binary option. If at the expiry time, your quote currency has indeed risen then your option will be in the money. You will then receive the payout offered on the online trading platform. If you think the quote currency will be weaker then you can purchase a Put forex binary option. If at the expiry time, your quote currency has indeed fallen then your option will again be in the money.

© 2010, Binary Options – Binary Options Trading. All rights reserved.