Forex options brokers can generally be divided into two separate categories: Forex brokers that offer online Forex options trading platforms, and Forex brokers that only trade Forex options trading through telephone trading. from a trading/brokerage desk. Some forex options brokers offer both online forex options trading and a trading/brokerage desk for investors who prefer to place orders through a live forex options broker.
Trading account minimums required by different forex option brokers range from a few thousand dollars to over fifty thousand dollars. In addition, currency option brokers may require investors to trade currency option contracts that have minimum notional values (contract sizes) of up to $500,000. Last but not least, certain types of currency option contracts can be entered and canceled at any time, while other types of currency option contracts lock you in until expiration or settlement. Depending on the type of currency option contract you enter into, you may be stuck on the wrong track with an option contract that you cannot trade. Before trading, investors should check with their FX option brokers regarding initial trading account minimums, required contract size minimums, and contract liquidity.
There are a number of different forex option trading products that forex option brokers offer to investors. We believe it is extremely important for investors to understand the distinctly different risk characteristics of each of the below mentioned forex option trading products offered by forex option trading firms.
Plain Vanilla Forex Options Broker – Plain Vanilla options generally refer to standard put and call option contracts that are traded through an exchange (however, in the case of Forex options trading, Plain Vanilla options would refer to standard generic option contracts that are traded through an over-the-counter (OTC) foreign exchange dealer or clearing house). In simpler terms, vanilla FX options would be defined as buying or selling a standard FX call option contract or a FX put option contract.
There are only a few forex options brokers/dealers that offer easy online forex options with real-time streaming quotes 24 hours a day. Most forex options brokers and banks only trade forex options over the phone. Vanilla Forex options for major currencies are well liquid and you can easily enter the market short or long, or exit the market at any time of the day or night.
Vanilla forex option contracts can be used in combination with each other and/or with spot forex contracts to form a basic strategy, such as writing a covered call, or much more complex forex trading strategies, such as butterflies, strangles, ratio differentials, synthetics, etc. . In addition, simple options are often the basis of forex options trading strategies known as exotic options.
Exotic Forex Options Broker – First of all, it’s important to note that there are a couple of different forex definitions for “exotic” and we don’t want anyone to get confused. The first definition of an “exotic” currency refers to any individual currency that is less widely traded than major currencies. The second forex definition of “exotic” is what we refer to on this website: a forex options contract (trading strategy) that is a derivative of a standard forex options contract.
To understand what makes an exotic forex option “exotic”, you must first understand what makes a forex option “unconventional”. Simple currency options have a final expiration structure, a payout structure, and a payout amount. Exotic currency option contracts may have a change in one or all of the above characteristics of a standard currency option. It is important to note that exotic options, since they are often tailored to the needs of a specific investor by an exotic forex options broker, are generally not very liquid, if at all.
Exotic currency options are generally traded by commercial and institutional investors rather than retail forex traders, so we won’t spend too much time covering exotic currency options brokers. Examples of exotic forex options would include Asian options (average price options or “APOs”), barrier options (payout depends on whether or not the underlying reaches a certain price level), baskets (payout depends on more than one currency or a “basket” of currencies), binary options (payout is cash or nothing if the underlying does not reach the strike price), back options (payout is based on the highest or lowest price reached during the life of the contract), compound options (options on options with multiple strikes and strike dates), spread options, picker options, packages, etc. Exotic options can be tailored to the needs of a specific trader, therefore exotic options contract types change and evolve over time to accommodate those ever-changing needs.
Since exotic currency option contracts are generally tailored specifically to an individual investor, most exotic option trades are traded over the phone through currency option brokers. However, there are a handful of FX option brokers that offer “if touched” FX options or online “one time payment” FX option contracts whereby an investor can specify an amount they are willing to risk change of a specified payment amount if the underlying price reaches a certain strike price (price level). These transactions offered by legitimate online forex brokers can be considered a type of “exotic” option. However, we have noticed that the premiums charged for these types of contracts can be higher than straight option contracts with similar strike prices and you cannot sell the option position once you have purchased this type of option; you can only try to offset the position with a separate risk management strategy. As a trade-off for being able to choose the dollar amount you want to risk and the payment you want to receive, you pay a premium and sacrifice liquidity. We encourage investors to compare premiums before investing in these types of options and also to make sure the brokerage firm is reputable.
Once again, it is quite easy and liquid to enter an exotic forex option contract, but it is important to note that depending on the type of exotic option contract, there may be little or no liquidity if you wish to exit the position.
Companies Offering “Betting” with Forex Options: Several new companies have appeared in the last year that offer forex “betting.” Although some may be legitimate, several of these companies are offshore entities or located in some other remote location. We do not generally consider these to be forex brokerage firms. Many do not appear to be regulated by any government agency and we strongly advise investors to do their due diligence before investing with any forex betting company. Invest at your own risk with these firms.
