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What Does Call and Put Mean in Forex Trading?
What does call and put mean in forex trading?
More importantly, how can you make money from them in forex?
There are tonnes of ways to make profit in the forex markets…
Currency options trading is one of the best ways!
Let’s dive in…
Understanding currency options
To start, imagine you’re the head of a multinational company based in the US. You want to buy a piece of equipment from Germany in about six months.
You need to exchange your USD for euros in six months, right?
But the value of the euro today isn’t what it will be in six months…
So, what do you do?
There’s a simple answer.
Trade forex options!
If you trade with forex options, you can pay a premium now for the right to purchase euros for an agreed price in six months.
That’s the nuts and bolts of it.
In this way, forex options give you the right to purchase a currency at a specific price and time in the future.
In our opinion, considering US citizens can’t trade forex with CFDs, currency options are the easiest way to trade forex in the US. Mind you, even if you come from a country that allows CFD trading, forex options aren’t a bad way to trade as well!
What Does Call and Put Mean in Forex Trading: What is a put option?
In the options trading world, you can trade long and short options.
There are two types of long and short options – calls and puts. You can trade both on the long (buy) and short (sell) side. For the remainder of this article, we’re only going to refer to long options because they are used for speculation.
By the way, if you want to make a lot of money trading options, forget about short options. Trading long forex options requires you to bet on a currency either increasing or decreasing. If you bet the right way using options, you can make a lot of money in the forex world.
Put options allow you to bet on prices falling.
It’s as simple as that…
You buy a put when you feel a currency’s value is going to fall.
What Does Call and Put Mean in Forex Trading: What is a call option?
Looking at call options, you trade them when you’re expecting a currency to rise.
I told you it was simple.
By the way, if you’re thinking about trading forex options, don’t bother learning about executing your options. Remember, forex options are an excellent way to trade the direction of a forex pair.
Here is an example…
Let’s say you’re bullish on the euro and believe it will go higher against the US dollar. If you buy a call option on the euro, and the price rises, you can make a lot of money.
What if you thought the price of the euro will fall in the future?
You got it.
Buy puts on the euro!
Let’s dig deeper…
What Does Call and Put Mean in Forex Trading: What’s gamma, theta and delta?
Have you heard about the Greeks?
‘The Greeks’ are measures of risk.
You must understand how they work in the options world. The Greeks is a deep and expansive topic. So, we’ll focus on the three basic Greek terms you need to know:
- Delta – measures the change in the price or premium of a currency option because of changes in the price of the underlying currency.
- Gamma – measures the rate of change of delta.
- Theta – measures price decay over time.
Theta is perhaps the most important of the three.
If you think the euro is going higher in the next six months, but you only buy a three-month call option, theta will devalue your option if it doesn’t go higher in the next three months. That said, if the option price is below the strike price close to the expiry data, the option price will most likely be worthless.
If you don’t know, strike price is the set price where you exercise the option. The strike price would be the price you think the currency will go to in the future, if you’re trading options. If the current price reaches the strike price, you can make a lot of money assuming it goes beyond the strike price in the option time frame.
For example, imagine the EUR/USD is $1.30 and you think it will be $1.50 in three months. You would probably buy a $1.50 call option, with three months to expiry. If the price goes above $1.50 in three months, you will make a fortune!
This brings us to the next topic…
In the money, at the money, and out of the money
If you have been researching options, you have come across these three terms: in the money, at the money, and out of the money.
But what do they mean?
‘In the money’ is when the options price exceeds the strike price, as per our above example.
‘At the money’ is when the options price equals the strike price.
‘Out of the money’ is when the options price hasn’t exceeded the strike price yet. These are cheaper to buy and most ‘out of the money’ options end up being worthless. But if you buy an ‘out of the money’ option and it eventually becomes ‘in the money’, you will make a fortune!
Your ‘Start With Forex’ Takeaway: What does call and put mean in forex trading?
Now you know the answer to the question: What does call and put mean in forex trading?
But you might be wondering: When’s the best time to buy puts and calls?
Let’s wind back the clock to answer that question…
Remember when Brexit happened in June 2016 and the pound fell by 10% to a 31-year low?
Few people thought it would happen…
But it did!
If you bought cheap ‘out of the money’ puts, with a short-term expiry date, you would have made a fortune! If Brexit didn’t happen, the pound probably wouldn’t have done anything. But considering it happened, unexpectedly, the pound nose-dived.
That’s how to trade options.
Your ‘Start With Forex’ Takeaway: If you’re looking to start trading forex options, don’t trade deep ‘out of the money’ options. Look to trade ‘out of the money’ but nearing ‘at the money’ options, since those options have a greater probability of becoming in the money.
If you want to learn how to trade forex like a professional, start by reading our FREE forex course. Remember, there’s a million ways to make a million bucks in the forex markets. So if you want a head start in forex trading, alongside our free course, check out our approved products page for forex trading signals and systems to help kick start your trading.
To your trading success,
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