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Facets that vary in Options and Futures
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Posted On :
Feb-10-2010
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Article Word Count :
581
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The Forex options and futures are similar contracts and have very thin line differences. Both the contracts facilitate the future trade deals.
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The Forex options and futures are similar contracts and have very thin line differences. Both the contracts facilitate the future trade deals. At Forex trading platform, future contracts are used to accept or deliver the desired currency pairs or the actual physical commodity whereas the option contract is the contract over underlying future contract.
Option contracts gives the trader the right not the compulsion to transact an underlying commodity and this underlying contract is the future contract. Because of such close relation in between the option and future it is clear that the option is based on the future contract or we can say that it is sideway strategy to transact a future contract.
Now, the question is-what is the need to use option trading in Forex transactions. To find out the answer of this question the Forex traders should evaluate the advantages and disadvantages of the option and futures.
Advantages of Futures: The two advantages of using future contract to transact the deal incorporate following:
If the price actions of the currency pairs are favorable with the respect to the trade position of the respective trader, the trader earns big returns through this trading alternative.
Another plus point with future contract usage there is no premium charge associated with its transactions.
Disadvantages of Future: There are some disadvantages too attached with the Forex trading as well.
It is subject to margin calls, the net price is liable to fluctuate with the basis change and that makes it difficult to pull out advantages from the favorable price moves of the currency pairs at the Forex trading platform.
Advantages of Options: The advantages of using options in forex trading are:
There is no margin call, profits can be fetched from the favorable price action of the currency pairs and the most significant one is that there is limited risk because the potential loss can be evaluated at the time of purchasing the option contract.
Disadvantages of Options: The other side of the option that throws light on the disadvantages of the option contract is:
Premium price is to be paid on the option contract purchase, the insurance or the premium price paid on to the option contract there are chances that they yield less returns as compared to other trading alternatives at certain situations in Forex trading platform.
If an option contract is implemented all the rules and regulation pertaining to future position will hold true. The option premium charged not necessarily shift currency for currency with respect to the future contract movement this refer to as Delta effect.
Moreover, future are one dimensional that indicates toward its feature that they follow one move at a time i.e. either they move up or go down along the trend which is directly proportional to the financial instrument implemented.
On the other hand, options are three dimensional because the price is influenced by many factors like the movement of the financial instrument, time factor that is expiration time and the volatility of the trading alternatives applied do bring fluctuation in the interest rates and the price of the options set.
Overall, when you apply things in right manner and at right proportion the trades can turn in to your favor and the same trade can move against if you had left any loopholes in application of forex trading alternatives.
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Article Source :
http://www.articleseen.com/Article_Facets that vary in Options and Futures_10667.aspx
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Author Resource :
Overall, when you apply things in right manner and at right proportion the trades can turn in to your favor and the same trade can move against if you had left any loopholes in application of forex trading alternatives.
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Keywords :
Forex, currency pair, Forex trading,
Category :
Finance
:
Investing
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