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Just Using A Forex System, Is It Enough?
http://www.forexdecoder.com/vps/?hop=robairemc
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Forex option brokers can generally be divided into two separate categories: forex brokers who
offer online forex option trading platforms and forex brokers who only broker forex option trading
via telephone trades placed through a dealing/brokerage desk. A few forex option brokers offer
both online forex option trading as well a dealing/brokerage desk for investors who prefer to place
orders through a live forex option broker.
The trading account minimums required by different forex option brokers vary from a few thousand
dollars to over fifty thousand dollars. Also, forex option brokers may require investors to trade
forex options contracts having minimum notional values (contract sizes) up to $500,000. Last, but
not least, certain types of forex option contracts can be entered into and exited at any time while
other types of forex option contracts lock you in until expiration or settlement. Depending on the
type of forex option contract you enter into, you might get stuck the wrong way with an option
contract that you can not trade out of. Before trading, investors should inquire with their forex
option brokers about initial trading account minimums, required contract size minimums and
contract liquidity.
There are a number of different forex option trading products offered to investors by forex option
brokers. We believe it is extremely important for investors to understand the distinctly different risk
characteristics of each of the forex option trading products mentioned below that are offered by
firms that broker forex options.
Plain Vanilla Forex Options Broker - Plain vanilla options generally refer to standard put and call
option contracts traded through an exchange (however, in the case of forex option trading, plain
vanilla options would refer to the standard, generic option contracts that are traded through an
over-the-counter (OTC) forex dealer or clearinghouse). In simplest terms, vanilla forex options
would be defined as the buying or selling of a standard forex call option contract or forex put
option contract.
There are only a few forex option broker/dealers who offer plain vanilla forex options online with
real-time streaming quotes 24 hours a day. Most forex option brokers and banks only broker forex
options via telephone. Vanilla forex options for major currencies have good liquidity and you can
easily enter the market long or short, or exit the market any time 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 spreads, synthetics, etc. Also, plain vanilla
options are often the basis of forex option trading strategies known as exotic options.
Exotic Forex Options Broker - First, it is important to note that there a couple of different forex
definitions for "exotic" and we don't want anyone getting confused. The first definition of a forex
"exotic" refers to any individual currency that is less broadly traded than the major currencies. The
second forex definition for "exotic" is the one we refer to on this website - a forex option contract
(trading strategy) that is a derivative of a standard vanilla forex option contract.
To understand what makes an exotic forex option "exotic," you must first understand what makes
a forex option "non-vanilla." Plain vanilla forex options have a definitive expiration structure,
payout structure and payout amount. Exotic forex option contracts may have a change in one or
all of the above features of a vanilla forex option. It is important to note that exotic options, since
they are often tailored to a specific's investor's needs by an exotic forex options broker, are
generally not very liquid, if at all.
Exotic forex options are generally traded by commercial and institutional investors rather than
retail forex traders, so we won't spend too much time covering exotic forex options brokers.
Examples of exotic forex options would include Asian options (average price options or "APO's"),
barrier options (payout depends on whether or not the underlying reaches a certain price level or
not), baskets (payout depends on more than one currency or a "basket" of currencies), binary
options (the payout is cash-or-nothing if underlying does not reach strike price), lookback options
(payout is based on maximum or minimum price reached during life of the contract), compound
options (options on options with multiple strikes and exercise dates), spread options, chooser
options, packages and so on. Exotic options can be tailored to a specific trader's needs,
therefore, exotic options contract types change and evolve over time to suit those ever-changing
needs.
Since exotic forex options contracts are usually specifically tailored to an individual investor, most
of the exotic options business in transacted over the telephone through forex option brokers.
There are, however, a handful of forex option brokers who offer "if touched" forex options or
"single payment" forex options contracts online whereby an investor can specify an amount he or
she is willing to risk in exchange for a specified payout 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 plain vanilla option contracts with similar strike prices
and you can not sell out of the option position once you have purchased this type of option - you
can only attempt to offset the position with a separate risk management strategy. As a trade-off
for getting to choose the dollar amount you want to risk and the payout you wish to receive, you
pay a premium and sacrifice liquidity. We would encourage investors to compare premiums
before investing in these kinds of options and also make sure the brokerage firm is reputable.
Again, it is fairly easy and liquid to enter into an exotic forex option contract but it is important to
note that depending on the type of exotic option contract, there may be little to no liquidity at all if
you wanted to exit the position.
Firms Offering Forex Option "Betting" - A number of new firms have popped up over the last year
offering forex "betting." Though some may be legitimate, a number of these firms are either off-
shore entities or located in some other remote location. We generally do not consider these to be
forex brokerage firms. Many do not appear to be regulated by any government agency and we
strongly suggest investors perform due diligence before investing with any forex betting firms.
Invest at your own risk with these firms.
John Nobile - Senior Account Executive
CFOS/FX - Online Forex Spot and Options Brokerage
Article Source:
http://EzineArticles.com/?expert=John_Nobile
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Just Using A Forex System, Is It Enough?
http://www.forexdecoder.com/vps/?hop=robairemc
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