What are Your Options Regarding Forex Options Brokers?

[Alan Perry]

Forex option brokers can generally be divided into two separate
categories: forex brokers who offer online forex option trading
platforms and forex brokers who only broker forex option trading via
telephone trades placed through a dealing/brokerage desk. A few forex
option brokers offer both online forex option trading as well a
dealing/brokerage desk for investors who prefer to place orders
through a live forex option broker.
The trading account minimums required by different forex option
brokers vary from a few thousand dollars to over fifty thousand
dollars. Also, forex option brokers may require investors to trade
forex options contracts having minimum notional values (contract
sizes) up to $500,000. Last, but not least, certain types of forex
option contracts can be entered into and exited at any time while
other types of forex option contracts lock you in until expiration or
settlement. Depending on the type of forex option contract you enter
into, you might get stuck the wrong way with an option contract that
you can not trade out of. Before trading, investors should inquire
with their forex option brokers about initial trading account
minimums, required contract size minimums and contract liquidity.
There are a number of different forex option trading products offered
to investors by forex option brokers. We believe it is extremely
important for investors to understand the distinctly different risk
characteristics of each of the forex option trading products mentioned
below that are offered by firms that broker forex options.
Plain Vanilla Forex Options Broker - Plain vanilla options generally
refer to standard put and call option contracts traded through an
exchange (however, in the case of forex option trading, plain vanilla
options would refer to the standard, generic option contracts that are
traded through an over-the-counter (OTC) forex dealer or
clearinghouse). In simplest terms, vanilla forex options would be
defined as the buying or selling of a standard forex call option
contract or forex put option contract.
There are only a few forex option broker/dealers who offer plain
vanilla forex options online with real-time streaming quotes 24 hours
a day. Most forex option brokers and banks only broker forex options
via telephone. Vanilla forex options for major currencies have good
liquidity and you can easily enter the market long or short, or exit
the market any time day or night.
Vanilla forex option contracts can be used in combination with each
other and/or with spot forex contracts to form a basic strategy such
as writing a covered call, or much more complex forex trading
strategies such as butterflies, strangles, ratio spreads, synthetics,
etc. Also, plain vanilla options are often the basis of forex option
trading strategies known as exotic options.
Exotic Forex Options Broker - First, it is important to note that
there a couple of different forex definitions for "exotic" and we
don't want anyone getting confused. The first definition of a forex
"exotic" refers to any individual currency that is less broadly traded
than the major currencies. The second forex definition for "exotic" is
the one we refer to on this website - a forex option contract (trading
strategy) that is a derivative of a standard vanilla forex option
contract.
To understand what makes an exotic forex option "exotic," you must
first understand what makes a forex option "non-vanilla." Plain
vanilla forex options have a definitive expiration structure, payout
structure and payout amount. Exotic forex option contracts may have a
change in one or all of the above features of a vanilla forex option.
It is important to note that exotic options, since they are often
tailored to a specific's investor's needs by an exotic forex options
broker, are generally not very liquid, if at all.
Exotic forex options are generally traded by commercial and
institutional investors rather than retail forex traders, so we won't
spend too much time covering exotic forex options brokers. Examples of
exotic forex options would include Asian options (average price
options or "APO's"), barrier options (payout depends on whether or not
the underlying reaches a certain price level or not), baskets (payout
depends on more than one currency or a "basket" of currencies), binary
options (the payout is cash-or-nothing if underlying does not reach
strike price), lookback options (payout is based on maximum or minimum
price reached during life of the contract), compound options (options
on options with multiple strikes and exercise dates), spread options,
chooser options, packages and so on. Exotic options can be tailored to
a specific trader's needs, therefore, exotic options contract types
change and evolve over time to suit those ever-changing needs.
Since exotic forex options contracts are usually specifically tailored
to an individual investor, most of the exotic options business in
transacted over the telephone through forex option brokers. There are,
however, a handful of forex option brokers who offer "if touched"
forex options or "single payment" forex options contracts online
whereby an investor can specify an amount he or she is willing to risk
in exchange for a specified payout amount if the underlying price
reaches a certain strike price (price level). These transactions
offered by legitimate online forex brokers can be considered a type of
"exotic" option. However, we have noticed that the premiums charged
for these types of contracts can be higher than plain vanilla option
contracts with similar strike prices and you can not sell out of the
option position once you have purchased this type of option - you can
only attempt to offset the position with a separate risk management
strategy. As a trade-off for getting to choose the dollar amount you
want to risk and the payout you wish to receive, you pay a premium and
sacrifice liquidity. We would encourage investors to compare premiums
before investing in these kinds of options and also make sure the
brokerage firm is reputable.
Again, it is fairly easy and liquid to enter into an exotic forex
option contract but it is important to note that depending on the type
of exotic option contract, there may be little to no liquidity at all
if you wanted to exit the position.
Firms Offering Forex Option "Betting" - A number of new firms have
popped up over the last year offering forex "betting." Though some may
be legitimate, a number of these firms are either off-shore entities
or located in some other remote location. We generally do not consider
these to be forex brokerage firms. Many do not appear to be regulated
by any government agency and we strongly suggest investors perform due
diligence before investing with any forex betting firms. Invest at
your own risk with these firms.

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