Options: Pros and Cons
Major pro: buying options limits your exposure. The maximum you can lose is the value of the option, the price you paid for it.
Purchasing options as a speculative vehicle offers limited downside -- you cannot lose more than the price you paid for the option -- and unlimited upside, at least on a call. If you purchase a put, your profit is technically limited to the underlying currency going to zero.
The cost of the option may be less than the margin on the same spot position.
Major con: you pay for the time value of an option.
Forecasting option pricing -- even given the price of the underlying currency -- is difficult.
If your option expires worthless, you lose your entire purchase price. This can occur from prices moving sideways and the time premium decaying to zero. If prices move sideways for the spot trader, he loses nothing and retains his margin funds. You may find prices of the currency moving in your favor but not fast enough to compensate for the time decay -- a discouraging predicament most options traders have experienced more than once. If the time on your option expires and the option is out of the money, its value is zero. (See Figure below.)
[caption id="attachment_13303" align="aligncenter" width="550"] The Downside of Options[/caption]