Traditional options allow the buyer the right (but not the obligation) to purchase something from the option seller at a set price and time. For example, a trader might purchase an option to buy two lots of EUR/USD at 1.3000 in one month; such a contract is known as a "EUR call/USD put." (Keep in mind that, in the options market, when you buy a call, you buy a put simultaneously just as in the cash market.) If the price of EUR/USD is below 1.3000, the option expires worthless, and the buyer loses only the premium.
On the other hand, if EUR/USD skyrockets to 1.4000, then the buyer can exercise the option and gain two lots for only 1.3000, which can then be sold for profit.
Since forex options are traded over-the-counter (OTC), traders can choose the price and date on which the option is to be valid and then receive a quote stating the premium they must pay to obtain the option.
There are two types of traditional options offered by brokers:
- American-style : This type of option can be exercised at any point up until expiration.
- European-style : This type of option can be exercised only at the time of expiration.
