This means that you do not actually take possession of the underlying currency. Instead, you are paid the difference between the market value and the strike price at the time of maturation.
If you want to trade currency options, you need an account with a broker or bank that allows access to this type of account. A forex broker is usually the best option if you are a retail trader. Banks often offer the same trading to institutional clients but only seldom offer it to retail investors.
Finding a forex broker is easy since there are a large number of well-established brokers on the market. Not all forex brokers offer options trading. Therefore, you should always verify that the broker you are considering opening an account with offers options trading before you open the account.
Options and binary options are not the same.
Please note that options and binary options are not the same things. They work in a similar way, but binary options limit your profits to a predetermined amount. You will always be paid that predetermined amount if the option matures in the money regardless of how much above or below the strike price the market value is at the time of maturation. A binary option will therefore limit your upside.
Binary options are also non-transferable once purchased. You are unable to buy and sell them as you can with a regular option. A regular option makes it possible to make a profit by trading with an option that ultimately does not end up maturing in the money. This is not possible with a binary option. I do not recommend binary options trading. Binary options are designed to make the broker money and are more like betting than it is trading.
Finding a broker
Below I will cover the most important things to consider when looking for a broker that allows you to trade forex options.
Forex options: Make sure that the broker features trading with forex options.
Regulatory body: You should always choose a broker regulated by a well-known regulatory body that offers strong investor protection. The risk of getting scammed is high if you choose an unregulated broker or a broker that is licensed by a low-quality regulator. Choosing a broker that is regulated by a strong regulator guarantees that the broker complies with best practices. Examples of strong regulatory bodies include the FCA, CySec, BaFIN and a number of other regulators. You can find a list of brokers regulated by trustworthy regulatory bodies by visiting daytrading.com.
Reputation: Choose a broker that has a good reputation in the market. Check reviews online and the broker's reputation on trader forums. Remember that no broker has a 100% positive reputation. There will always be unsatisfied traders. You should look for a broker where the majority of clients are happy with the service.
Feed and Commissions: Choose a broker with low fees and spreads. I recommend that you choose a broker that doesn't charge any account fees, only trading fees. High fees make it a lot harder to make money, and it is, therefore, very important to choose a broker with the lowest fees possible while still offering the features you need.
Platform: Make sure that the broker provides access to the platform you want to use if you want access to a certain trading platform, such as MetaTrader or Ninjatrader. If you are new to trading or if you do not have a preferred platform, then you can choose any broker since all reputable brokers provide access to decent platforms.
Demo account: A demo account is an account that you can use to make virtual trades without risking any real money. A demo account is a very powerful tool that you can use to learn how to trade and that more experienced traders can use to try out new strategies. You should always choose a broker that provides you with a free demo account.
Software: If you want to use other tools or software, then you need to ensure that the broker allows you to use these tools. An example of this is if you want to use auto trading platforms. Some brokers restrict the usage of auto trading software while others do not. Choose a broker that allows you to use the tools you want to use.
Mobile trading: The quality of the mobile trading platforms can vary a lot between different brokers. Choose forex brokers that provide access to a well-designed mobile platform if you want to trade on the go. Note that the desktop platforms will always be better and offer more features. I recommend that you trade on a desktop or laptop if you are able to do so.
Customer support: You should hopefully never have to contact customer support. But if you do, it is important that the broker offer good customer support when you need it. Choose a broker that is known for good accessible customer support.
- Banking options: You should choose a broker that provides you with a banking option that is fast and easy for you to use. The broker should make it easy to deposit and withdraw money. The banking options should preferable be cheap to use so that you can deposit and withdraw money without paying a lot in fees. Many brokers offer banking options such as wire transfers, VISA, MasterCard and different e-wallets such as Paypal and Skrill.
Choosing a broker does not have to be difficult. Plenty of good forex brokers offer everything you will need when first starting to trade forex options. Do not be afraid to choose the wrong broker. You will be fine as long as you choose an established regulated broker. If you do not like the broker, you can always switch to another broker later on once you have gained some experience and a better understanding of exactly what features you want from your broker.
This is a contributed post.