Options or Spot FOREX?

If you have concluded that a currency is going up or down in price, you may buy a call or buy a put on the currency. The number of pairs offered to retail traders is growing quickly. Two or three years ago, only the majors were available; today, some brokers offer them on more than 40 pairs. You gain the advantage of limited risk but pay for that limited exposure. Much like an insurance policy, if you do not use it, it is lost.

Unfortunately, that limited risk tends to lull inexperienced traders into a false sense of security.
They do not have to make a decision about getting out of a bad trade because of a margin call and are prone to letting a losing trade ride until either the price of the currency is so far away or there is so little time value remaining that the option expires worthless. As a young trader in 1973, I watched my five Ford options slide from 11/2 to zero over a two-week period. "Tomorrow will be a better day." Tomorrow never came. Always keep in mind the basic options position. You may see the currency price go in your favor but the time value decays at a faster rate. The net result is that your option goes down in value.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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