Forex options trading has been around in rudimentary forms, especially among banks, for many years; but it has not been prevalent in the retail sector. As retail traders become more familiar with both forex markets and options theory, that will change.
In Futures’ yearly update of our forex brokers chart, we spoke to all of the firms on our list to find out who offers forex options and how traders put them to use.
Retail traders are utilizing options to a greater degree and many would like the same opportunity to take advantage of price movement without the total exposure of the outright positions in forex. Also, the use of more complex trading strategies and hedges is growing in the retail space.
Forex options do not work exactly like simple currency pairs, so they are not executed the same way. While trading currencies involves clicking-the-bid or clicking-the-offer on an electronic platform, forex options are more like requests-for-quotes, almost like customized quotes, according to Dan O'Neil, principal at Xpresstrade. This may make it difficult for a firm to offer and implement forex options.
Samantha Roady, SVP of marketing at Gain Capital Group says Gain does not offer forex options to retail clients because of the lack of demand from that base, but Gain does offer it to their professional clients.
“Because the forex market is new to most retail investors, we feel the sensible approach is to trade the cash market first in order to come up the curve on price action and market dynamics before adding the complexity of options,” she says.
Patricia Muchinsky, an options trader at Forex Capital Markets, agrees. “Corporates and institutions that find themselves with currency exposure are more likely to employ hedging strategies such as options and forwards to protect themselves. Many retail clients are still somewhat apprehensive about actively trading options and don’t always completely understand the risks associated with such instruments. The whole concept of pricing and volatility may still be foreign to many retail forex traders,” she says.
As more retail traders become aware of the benefits of options, forex platforms will have to adapt or face losing market share to exchanges offering options on currency futures.
“One of the main features of forex options is the ability to have a view on the market and not have to micro manage positions,” says Scott Slutsky, managing director at Alaron, which has a forex division that offers forex options. “Many traders face the problem of taking a view on a particular currency pair, establishing a stop loss and then getting stopped out of their position, only to watch the market go in the direction they originally thought. With options, traders can take a view (long or short term) and not worry about facing the inevitable market gyrations,” he says.
“Let’s say the euro currency is currently trading at 1.2500. You feel that the market will fall to 1.2000 in the next three months,” Slutsky says. “You can buy a 1.2500 put that expires in three months. If your view is correct and the market goes to 1.2000, then you would be able to make 500 points, minus the cost of the option. However, if the market does not go in the direction you predict, then you would lose your cost price of the option. This is the most simplistic method of using options. Of course, it is very important for traders to understand how options are priced. Furthermore, it is important for all traders to understand the breakeven level for their option (the point where the option has to go in the money to offset the cost of the option). Also, it is important for traders to understand options are a decaying asset. In other words, as each day passes, the price of the option will diminish basis the fact that there are fewer days for the option to go into the money,” he says.
Slutsky adds that trading forex options requires a lot of education on options themselves and that is another reason forex options have not yet become extremely popular in the retail space.