In recent years, Singapore has received a daily turnover increase in forex transactions. According to a report released in 2016, a 35% increase in daily turnover had been witnessed in Singapore over a span of three years.
This increase in daily turnover has placed Singapore as the third largest global financial centre.
With forex trading becoming more popular and common in Singapore, it is important to understand what forex trading is all about.
Forex trading can be defined as the act of converting one currency into another with the aim of making a profit.
Just like in any other form of trading, there are different options available in every form of investment. Similarly, there are options that are available to traders in the retail forex trading.
Options trading are derivative financial tools. With these options, a trader is given contractual right to either buy or sell a fixed amount of currency.
This is usually done over a stipulated amount of time at a specific rate. In the contract, the buyer is usually expected to pay a certain amount of money to the seller after acquiring the option.
The fee paid to the seller is referred to as the premium.
Types of Options Trading
Some of the available options trading to retail forex traders include;
Commonly known as single payment options trading (SPOT). In this type of option, a currency trader buys the option by predicting a desired scenario.
For example, the trader may predict that in 20 days from now, the American dollar versus the Singaporean dollar (USD/SGD) will have an exchange rate of let’s say 2.0000.
After making the prediction, a premium is quoted and the trader buys it. Now, if the predicted scenario occurs, the SPOT pays out and it is automatically converted to money.
In the call options trading, the buyer is given the right to buy a pair of currency. The purchase is done at a given exchange rate at a fixed amount of time in the future.
On the other hand, the put options trading gives the buyer a right to sell a pair of currency at a certain exchange rate over a fixed amount of time in the future.
Although these two options give the traders a right to either buy or sell, they are placed under no obligation to do so.
In case the options are put out of the money by current exchange rate, the options end up expiring without any worth.
These are options used by traders to either make profits or protect themselves against losses. Professional forex traders can make use of the wide variety of exotic Options.
However, most of exotic Options contracts are usually thinly traded. This is because, these options can only be offered over the counter.
Reasons Why Traders Prefer Forex Options Trading
There are some reasons why most traders prefer options trading. They may include;
- Options trading gives traders a chance to not only trade but also to make profits by predicting the direction that the market takes. This can be based on either political, economic or any other information.
- Options trading used in cash or spot market also offer instant settlement involving the transactions of commodities and securities.
- A number of traders have also used forex options trading as a way of hedging open positions in forex cash market that they desired.
- Options trading have unlimited positive potential as compared to their limits of negativity. This is because, in case of a loss, a trader stands at risk of only losing the premium paid for the purchase of the option.
Although forex trading has been said to involve a lot of risks, one cannot overlook the advantages that forex trading offers.
Some of these advantages include; better risk management, easy entering and exiting of trades, low entry barriers, low transaction costs and the fact that you get to trade whenever you want.