Trading forex options
This would mean that you as holder don't have any obligation to buy or sell the currency pair but, if you decide to do so, the seller is obliged to deliver. So, there are two types of options, the call option and the put option. You will take the call option if you expect a price rise and lock the price at which you can buy the pair in the future. If you will want to hold a put option if you anticipate price decrease because you will set the price at which you will be able to sell the currency.
For instance, you can set a purchase price for the EUR/USD of 1.10 in anticipation of a price increase. It turns out that you are right and the price indeed increases up to 1.20. Because the option gives you the right to buy the EUR/USD pair at 1.10, you decide to activate it and buy the pair at the agreed price. After buying the EUR/USD at 1.10, you can sell it at the forex market for 1.20 and cash in the difference immediately. If for some reason the price moves against you and falls to 1.08, then you will leave the option to expire. It should be noted that irrespective of whether you activate the option or not you pay a certain premium to the option seller and this premium is the maximum loss you can have.
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