Quote from ElectricSavant:
The e-forex market keeps getting better for the investor. The rule seems to be that whatever the institutions have to trade, the public will soon have access to it as well. First, spot forex was exclusively for institutional trades and bank customers. Today, everyone can trade spot forex. Now, come options on spot forex. That¹s right, spot forex options.
These will be excellent tools for controlling risk in the e-forex market. an option place can help considerably. The trader can virtually control the risk and the duration of that risk. With OTC options on spot forex, you could buy a call at any strike price and at a time of duration that you want.
There are downsides, though. A trader needs to understand that options on spot contracts are different in a major respect from options on futures currency contracts. Buying or selling an option on spot is a negotiated deal with the bank. Yes, they use the Black-Sholes formula to determine premium value, but there is no market price. You can buy the option, but it is possible that when you want to sell it there is no buyer. The lack of price transparency is another risk. If you're trading a forex spot option, the price you paid may be quite distant from its theoretical value, and an informed trader can determine what that price ought to be. Also note whether the option is an American option or European. The European option can be exercised only on a set date.
