Options can be used in a variety of ways to profit from a rise or fall in the underlying currency pair. The most basic strategies employ put and call options as a low capital means of garnering a profit on market movement. Options can also be used as insurance policies in a wide variety of trading scenarios. You probably have insurance on your car or house because it is the responsible and safe thing to do. Options provide the same kind of safety net for trades and investments. They also increase your leverage by enabling you to control the currency pair without tying up a large amount of capital in your trading account.
The amazing versatility that an option offers in today's highly volatile markets is welcome relief from the uncertainties of traditional trading practices. Options can be used to offer protection from a decline in the exchange rate of a long underlying currency position or an increase in the exchange rate of a short underlying currency position. They can enable you to buy a currency at a lower price or sell a currency at a higher price. You can also use option strategies to profit from a move in the price of the underlying currency rate regardless of market direction.
There are three general market directions: up, down, and sideways. It is important to assess potential market movement when you are placing a trade. If the market is going up, you can buy calls or buy the underlying currency. Do you have any other available choices? Yes, you can combine long options and positions in the underlying currency in a wide variety of strategies. These strategies limit your risk while taking advantage of market movement.
| Bullish Limited Risk Strategies | Bearish Limited Risk Strategies |
|---|---|
| 1. Buy Call or 2. Buy underlying currency and buy a Put |
1. Buy Put or 2. Sell underlying currency and buy a Call |
It is of paramount importance to be creative with your trading. Creativity is rare in the stock and options market. That's why it's such a winning tactic. It has the potential to beat the next person down the street. You have a chance to look at different scenarios that they do not have the knowledge to construct. All you need to do is take one step above the next guy for you to start making money. Luckily the next person, typically, does not know how to trade creatively.
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