March 27, 2018

Question:How does Option trading work? Any examples?


You choose to trade options for different reasons.

  1. To speculate on currency movements.
  2. When you have a spot trade that you want to hedge.
  3. If you are an importer or exporter you aim to secure a future income.

The world’s financial markets are more exciting now than ever.

You can trade options online just like Forex, Stocks and Commodities, and the beauty of trading online platform is its simplicity.

When you buy an option, you buy a future guarantee for a fixed price.

What are the merit of Option Trading?

A huge advantage of trading options is that you don’t get charged “Rolling Fees” for each day your deal is open.

And when the time comes, you choose whether to take it or not.

Opening an option deal is basically buying or selling a currency pair at a set expiry point in the future.

And once you buy the option you’ve bought the right to cash it in at any time up to the expiration date.

Let’s see how options work in this example.

Example of Option Trading

William has a small jewelry workshop, he buys gold to make jewelry and sell it.

William buys 100 ounces of gold from a supplier every 3 months.

He’s aware that gold prices may change and he wants to get fixed prices for his future purchases.

To do so, he signs a contract with a supplier, Robert.

Robert sells Gold to William at a fixed price for a small fee, the premium.

On the delivery day, William has two alternatives William can either buy the gold from a supplier or buy it directly from the market.

If the market price is lower than what they’ve agreed, then William can cancel his contracted with Robert and buy from the market.

So Michael only receives his premium.

If the market is higher than what they agreed William will buy from a supplier Robert at the pre-agreed price which is lower than the current market price.

That’s the principle behind options.

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