Forex Options Trading http://www.theforexnittygritty.com/forex-trading/forex-options-trading There are three good reasons for Forex options trading. In international business transactions Forex options trading helps hedge currency risk. In volatile markets Forex options trading both helps limit risk while providing profit potential. And traders can use Forex options trading to provide extra leverage for their trading capital. Here are snapshots of each reason for Forex options trading. Limiting Currency Risk When a Japanese airline signs a contract to buy a Boeing jet they will eventually have to pay in US dollars. They may already have the money but will not pay until the jet is delivered a year or two later. What happens if the US Dollar rises in value versus the Japanese Yen? That will make the airplane more expensive. The company could just pay up front but they probably have good use for the money while they are waiting. They could also change their Yen to dollars and wait. Alternatively they can use Forex options trading to contain their currency risk. The company buys calls on the US Dollar with Yen. The cost of this is much less than the money put aside for the airplane. If the dollar goes up the Japanese airline will execute the contract and obtain the necessary amount in dollars. If the dollar goes down they will let the contract expire and end up paying less for the airplane when they convert to dollars. This is the junction of Forex trading and currency risk. Staking Out Positions in a Volatile Market There are times when it is difficult to know which way a currency pair will go. When there are very volatile foreign currency rates traders can use options to limit their trading risk and leverage their trading capital. A basic and fairly common strategy is called a long straddle. A trader buys both a put and a call on one currency with the other. If the currency pair moves significantly in either direction the trader will execute the put or the call and make money. The risk in this strategy is that the currency pair ceases to be volatile in which case the maximum loss is the price of the two options contracts. Getting a Lot for a Little Leverage is a useful aspect of Forex options trading.