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Is There Opportunity for Options in FOREX?

By: , dated April 22nd, 2013

Options, especially, have come into their own with retail traders—both as an investable vehicle in and of themselves and as a risk management tool for spot FOREX positions. Exotics, which were just getting a head of steam in the United States, were cut down by the new margin requirements instituted in 2010.

Options and exotics offer new possibilities for traders and open many doors to new and exciting trade opportunities. My advice: There is enough action in the major pairs and the top-tier minors and crosses in the spot market to satisfy most traders. Consider options as a money management tool more than as a substitute for spot FOREX. Trade options as speculative vehicles only after you have become experienced in the spot market of the major pairs and crosses. That said, currency option trading for speculative purposes is expected to continue to grow in the years ahead. The magnet of limited risk—whether rational or not—is appealing to many traders. As volume increases, also expect a rise in the interest of sophisticated option plays as opposed to the simple buying and selling of puts and calls. If brokers see a market for a certain exotic, they will offer it.

Exotics have real appeal to the experienced trader, in my opinion. While liquidity is poor and fills on trades can be miserable, the trends tend to be long. If you can get aboard, you might catch a nice long ride. When online retail FOREX first began in the 1990s, the markets were inefficient; classical chart patterns that have not really worked well in futures or stocks for decades played out like textbook examples for two or three years. Alas, more traders arrived, and with them, the liquidity and the efficiency and the easy pickings disappeared. There is a sense that because of the low interest—for now—in exotics, the markets are still relatively inefficient. This market inefficiency can make them subject to better profit potential than the majors, ceteris paribus. I see clean classical chart patterns, for example, frequently on the longer-term EUR/PLN (Euro Polish Zloty) charts. But be cognizant of the minimum margin requirement of 10 percent for U.S. FOREX traders. If you have the experience, time, and the inclination, spot FOREX exotics may well offer meaningful opportunities. Because of liquidity, spreads, and—in the United States—poor leverage—they are usually better long-term trade candidates. Specializing in an exotic can offer a basic course in fundamental analysis, at the very least. Adopt a Baht today.

"Adapted from Getting Started in Currency Trading.
Copyright 2012 by Michael Duane Archer. All rights reserved. John Wiley & Sons, Inc."
Content provided here under exclusive license
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 2014. Content published with author's permission.

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