FX options may sound like a complex and complicated financial term, but in reality, they don't have to be effects. Options can be a useful addition to any investment strategy, whether it's a simple directional play that simply a currency pair moving higher or lower, or a large portfolio. FX options can be used as a direct investment to, for expressing a view in the underlying market, but they can also be applied as a hedging tool to be used in conjunction with existing positions, effects options.
Therefore give investors increased flexibility. There's allows you to tailor the risk profile of your positions to match any market view that you might have. You can use ethics options to express a view on a market moving higher, moving lower, or even from market that's moving sideways. FX options can also be used to express a view on future volunteer.
For example, if you believe the ethics market is about to move, but unsure about the direction you can structure your portfolio to benefit from a move in either direction. Furthermore, FX options offer the ability to leverage your positions and therefore significantly increase the potential profits. So let's look at how effects options are.
When we trade FX spot, we buy one currency and simultaneously sell another at whatever the market price is at that time spot refers to the current price. If the currency report rises in value against the currency we sold, we make money. And conversely, if the value falls we lose. An option on the other hand is about trading the currency pair in the future.
And only if the price is in our favor at that time, it's the possibility of trading the currency, paying the future at a predefined price, but it's not an application to do. The basic and most common options type is called a vanilla option. And there are two types of vanilla options call options and put options.
A call option is the right to buy a currency pair at a certain date in the future referred to as the expire date of the option and at a certain price. This is known as the strike price of the option. Buying a put on the other hand gives you the right to sell the underlying currency pair at the strike price on the expiry date effects options are very flexible.
You can choose exactly which strike fits your strategy and how long you want the option to learn. The combination of different strikes and expired dates will determine the price or premium of the option. In other words, the price you have to pay in order to take the option. We'll take a look at this in the next few pages.
A call option is a contract which allows the investor to buy a specific amount of the underlying currency pair at the time that the option is. The maturity of the option and the strike price are predefined. And both of these paramitas impact on the price, the option to buy the underlying currency pair is exactly what it sounds like an option.
It is not something you are obliged. If the underlying currency power treating above the strike price at the end of the option contract, then the investor can use the right and exercise the option to buy the currency pair at the strike price. If the underlying spot price doesn't reach that level and continues to trade below the strike price, then the investor can simply choose to let the option expire without doing anything.
This basically means that the investor gets the upside potential on. Without the downside risk. Let's take a look at an example. We're looking at Euro dollar spot, currently trading at 1.1 Siro Siro Siro. We expect the currency pair to trade high over the next two weeks and therefore set a target at 1.1300.