The FOREX options trading market began as an over-the-counter (OTC) monetary
vehicle for large banks, financial organizations, and international companies to
hedge against foreign currency exposure. Similar to the FOREX spot market, the
FOREX options market is referred to as an "interbank" market.
FOREX option trading has appeared as an alternative investment for many
traders and investors. As an investment tool, option trading offers large as
well as small investors great flexibility when determining the suitable FOREX
trading and hedging strategies to implement. A majority of the FOREX options
trading is conducted over the telephone as there are only a few FOREX dealers
providing online option trading platforms.
A FOREX option is a monetary currency bond giving the option buyer a right,
but not a commitment, to buy or sell a particular spot contract (the underlying)
at an explicit price (the strike price) on or prior to a specific date (the
expiration date). The sum paid by the option to the seller for option contract
rights is referred to as FOREX option "premium."
The only primary financial responsibility of the option buyer is to pay the
premium to the seller up front when the option is originally purchased. When the
premium is paid, the option holder has no other financial commitment until the
foreign currency option either is offset or expires. Primarily, the option
seller collects the premium paid by the option buyer. The sellers must have the
funds in their account to cover the initial margin requirement.
Both, the foreign currency options buyers and sellers can either offset the
option contract in the options market before termination, or choose to hold the
option contract until it expires. It is important for investors to understand
that "puts" and "calls" are different foreign currency options contracts and are
not the contrary sides of the same transaction. For each put buyer there is a
put seller, and for each call buyer there is a call seller.
