In the beginning of Forex trading adventure almost everyone sticks just to currency pairs like EURUSD or GBPUSD. Later they become aware of other options, for example vanilla options. There are many more complex derivatives, but vanilla options are easy to comprehend and they could be really profitable.
What are vanilla options?
The mechanism is very simple. They give right to buy or sell currency pairs for specific price on specific day in the future (expiration date). The price is called strike. You do not need to wait for expiration date with selling/buying. For instance, you can buy vanilla option which expires in 6 months, and you will have possibility to sell it any time before this date to have bigger profit.
Vanilla options are available for many apris, not only majors. When you use vanilla options, you can decrease risk. For example, if you have huge position on EURUSD, you can buy USDEUR option. It is cheaper than normal trading, so you have possibility to limit your loss if the pair will go in opposite direction. On the other side, if the pair will go in desired direction, you just pay small sum for protecting the investment. It is some kind of insurance.
If you decide to open CALL or PUT option, you have the right to buy or sell option for strike price. You do not have the obligation to sell it, so you risk less. It looks like this: option value is the difference between strike price and current one + provision for opening. In the worst case you just risk this provision. However when you sell the option, be careful – in this case buyer has the right to use it and you are obligated to sell, which means that you risk more.
Options are also connected with higher leverage than in case of Forex trading. The price of buying it is connected with the difference between current price and strike price. In case of buying or selling currency pair only absolute price is right. The difference is smaller than total cost so you get higher leverage which means higher possibility to earn.