The Forex exchange market appeared as a financial vehicle and eventually became an investment tool for many investors and traders. It appeared so that large banks, financial institutions and corporations could protect themselves from currency being exposed. There is Forex spot market and options market. It is available to most individuals and corporations through the internet. And that is why a lot of investors work through phone or online.

Forex option trading is an alternative tool that helps investors to find more flexible and appropriate strategies in their trading. It is a financial contract that gives the option buyer the possibility but not the necessity to buy or sell a particular Forex spot contract at a definite price on a definite date. There is also an Forex option “premium”, which is a price that an option buyer pays to the seller for the contract. The Forex option buyer has the right to sell or to hold the option contract till the expiration date. The only thing the buyer has to do is
to pay the premium to the contract seller in advance, before the purchase. After the premium is paid, the buyer has no other obligations until the option is expired, for example.

The Forex option seller (the “writer” or “grantor”) is obligated by the contract to take the contrary spot position if the buyer exercises his right. The seller get the premium that is paid by the buyer. But the seller’s trading account needs to have funds in order to cover the requirement of the initial margin. So, if the market moves in a good direction for the seller no more funds need to be added to the initial margin, but in case the market move is not in the favorable direction for the seller, the additional funds need to be posted to the currency trading account in order to balance it with the margin requirement. And, of course, just as the buyer, the seller has the right to either hold the contract before the expiration date or to buy it back. The buyer has to pay the premium to the seller in every option deal.

There is a Plain Vanilla Forex Option and Exotic Forex Options. Plain vanilla options are referring to the general call and put option contracts via exchange. so, it could be defined as standard Forex call or put option contract buying or selling. Plain vanilla options have a set payout amount, structure and expiration structure. These features, though, could be changed in an exotic Forex option.

The price of an option is defined in two parts - the extrinsic (or time) value and the intrinsic value. The intrinsic value of a Forex option it is a difference between the Forex forward rate (European options) or Forex spot rate (American options) and the strike price. The intrinsic value can never be negative and it represents a real value of the exercised option.

Beyond the intrinsic value there is an extrinsic value or time value. It could be defined by the time left till expiration, the volatility of the two currencies, the riskfree interest rate of the currencies, the strike price of the Forex option and the spot price of both currencies. The volatility is an important factor and it defines changes in prices. Its increase causes the call and put option price to go up too.

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