Forex option
Options are derivatives instruments the value of which is being derived from an underlying asset. Forex option give the buyer right to sell/buyer a currency at a particular rate on a particular date.
There are two kinds of options.
Put options
Call options.
Put option: - this gives the buyer right to sell a particular currency at a specified rate (called strike rate) on a specified date (called expiry date).
Call option: - this gives the buyer to buy a particular currency at a specified rate on a specified date.
These options are designed in various styles to invent products (option strategy). Certain product are listed and explained below.
1. Plain vanilla: - This Forex option is being called as simple option. If we buy put or call option by paying premium which have all the normal features of option, then such options are called plain vanilla.
2. Strangler option: - Here the buyer of options will get both put & cal with different strike price, but same maturity & asset. This will be profitable for the investor only if there is an expectation of huge volatility in the market or in the price of underlying asset. Normally these Forex option are costlier comparing to plain vanilla and will help only if delta of such currency is supportive.
3. Straddle: - Here the buyer will hold position in both put & call with same strike price, expiry & underlying. This is very costlier option than stragler. If market has not moved either direction from the level where the buyer has entered, buyer will experience a good amount of loss. But in a highly fluctuating situation this option will give handsome money. This suitable for those investors who dont have idea in which direction the market will move after a very narrow range bound session and expecting a huge break out.
4. Ratio Spread: - Here the buyer of an option is holding unequal number of long & short positions. That is buyer will purchase put & call based on the ratio which he has determined. Normally used ratio is for every one call option purchased buyer will sell two call options with different strike prices. Eg:- bought one call with strike price @ 1.2000 & sold two calls @ 1.2500 in case the currency moved higher towards 1.24 levels but stayed below 1.25, then the buyer will get good profit but if it moves beyond 1.25 level he will end up in loss.
Spread Option: - This is an option its value is being derived from the difference in the price of tow or more assets. This option can be written on any kind of financial assets. This is primarily traded in the OTC market.
5. Butterfly spread: - This option combines bull as well as bear spread. It will be having three strike prices. The lowest price will be assigned to two bull spreads and highest price will be assigned to one bear spread. This option limits the risk as well as profit.
6. VIX options: - This option allows the buyer to trade the market volatility. This is a type of non-equity option which uses the COBE volatility Index as underlying to trade. This is very useful for those fund managers to hedge their portfolios against steep fall due to crisis as well as speculate on future moves.
7. Swaption: - This is an option to enter into an interest rate swap. By paying premium the buyer gets the right but not the obligation to enter into a swap deal on a specified future period with the issuer.
8. Bermuda option: - This is a kind of Forex option which can be exercised only on a predetermined dates. Eg: - every month 1st day. This is a combination of both American & European style option.
9. European Option: - A put or call option which can be exercised only on a predetermined specified date. This can be exercised only at the end of its life cycle.
10. This is a kind of option which is unlike American & European style to calculate or to ascertain the payoff. This allows the investor of the option to choose whether the option is put or call during the life of the option. This option is very complex than normal one that traded on exchange and generally over the counter.
11. Mid Atlantic Option: - This is an option which can be exercised at various times during the life period of the option. Those times will be clearly specified in the option and allow flexibility for both the writer & holder of the option. This options exercise dates are more flexible than European Option and less flexible comparing to American Option. That is why it is being called as Mid Atlantic option, like Atlantic Ocean which is situating between Europe & US.
12. Balloon Option: -This options notional principal will be drastically increased after a set barrier is broken.
13. American Option:- This options allows the holder to exercise the option at any time before it expires.
14. Asian Option:- This options payoff is depending on the underlying assets average price over a period of time. It is also known as average option. This option is less costly comparing to an American option.
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