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 ticks higher to near 1.1800 ahead of flash German inflation data
The EUR/USD pair trades marginally higher to near 1.1810 in the late Asian trading session on Friday, ahead of the release of preliminary inflation data for February from Germany and its major states during the day.
GBP/USD struggles to lure buyers amid UK political drama, BoE easing bias
The GBP/USD pair struggles to build on the overnight modest bounce from the 1.3445 area, or the weekly low, and oscillates in a narrow band during the Asian session on Friday. Spot prices currently trade just below the 1.3500 psychological mark, nearly unchanged for the day, and seem vulnerable to slide further.
USD/JPY falls back below 156.00 as Tokyo CPI backs BoJ's hawkish outlook
USD/JPY attracts fresh sellers for the second straight day following the release of Tokyo CPI, which grew slightly more than expected in February. This comes on top of hawkish comments by BoJ officials and backs the case for further policy tightening, providing a modest lift to the Japanese Yen. Apart from this, sustained safe-haven buying, amid trade-related uncertainties and geopolitical tensions, benefits the JPY's safe-haven status. However, reduced Fed rate cut bets underpin the US Dollar and could help limit losses for the currency pair.
Editors’ Picks
EUR/USD ticks higher to near 1.1800 ahead of flash German inflation data
The EUR/USD pair trades marginally higher to near 1.1810 in the late Asian trading session on Friday, ahead of the release of preliminary inflation data for February from Germany and its major states during the day.
GBP/USD struggles to lure buyers amid UK political drama, BoE easing bias
The GBP/USD pair struggles to build on the overnight modest bounce from the 1.3445 area, or the weekly low, and oscillates in a narrow band during the Asian session on Friday. Spot prices currently trade just below the 1.3500 psychological mark, nearly unchanged for the day, and seem vulnerable to slide further.
Gold awaits acceptance above $5,200 and US PPI data
Gold consolidates previous rebound near $5,200 amid risk-off markets, awaiting US PPI release. The US Dollar eyes a flattish weekly close as dovish Fed outlook and tariff woes outweigh geopolitical risks. Gold yearns for acceptance above $5,200 to resume the uptrend, with a bullish RSI in play.
Bitcoin, Ethereum and Ripple consolidate with short-term cautious bullish bias
Bitcoin, Ethereum and Ripple are consolidating near key technical areas on Friday, showing mild signs of stabilization after recent volatility. BTC holds above $67,000 despite mild losses so far this week, while ETH hovers around $2,000 after a rejection near its upper consolidation boundary.
Changing the game: International implications of recent tariff developments
The Supreme Court ruling on International Emergency Economic Powers Act (IEEPA) tariffs provides limited relief for the rest of the world, with weighted average tariff rates modestly lower.
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