What Are Options
Options can be used for speculation -- to make a profit -- or as a hedge -- to protect a position maintained in the normal course of one's business. If you hedge a speculative spot FOREX position with options, it is considered a speculative hedge. It is only a true hedge if you are protecting a legitimate business transaction involving currency risk.
For speculation, options can be used as either a trading instrument or as a money management tool paired with spot FOREX trading.
I strongly advise new traders to become fully comfortable in the spot FOREX space before considering options.
In options, time is not on your side. It is a constantly deteriorating (decaying) value. The price of the underlying currency must not just move in your favor to make money; it must move enough to compensate for the time decay. Every options trader has experienced this: the call is due to expire soon and suddenly the underlying vehicle (a stock, a commodity, a currency pair) begins to move up, sometimes dramatically. But the option is decaying even faster than the underlying vehicle is going up. The result: the price of the option continues to go down. In the meantime, the buyer of the spot pair has made a tidy profit.
By Michael Duane Archer