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Advanced Option Strategies

How Do SPOT Options Work?

Option exchanges are constantly looking for new ways to attract traders.  There used to be very few exchanges available,  but with the migration from the physical option trading floors to electronic or “virtual’ floors, it seems that a new one pops up every week. Over the past few years we have seen a real emergence in currency options.  Currency Options give retail traders many opportunities to limit risk and increase profit. 

Two Types

There are two primary types of options available to retail forex traders. The most common is the traditional call/put option, which works much like the respective stock option. The other alternative is “single payment option trading” – or SPOT – which gives traders more flexibility.

[We have discussed traditional option trading at length so please refer to earlier articles if you need to review. ]

How Do SPOT Options Work? 

The trader inputs a scenario (for example, “EUR/USD will break 1.3000 in 12 days”), the option scenario gets a quote from the market maker and then receives a payout if the scenario takes place. Essentially, SPOT automatically converts your option to cash when your option trade is successful, giving you a payout.
 
There are many different types of SPOT options out there.  Here are a few of the available types of SPOT set ups: 

  • One-touch SPOT – You receive a payout if the price touches a certain level at any time before expiration
  • No-touch SPOT – You receive a payout if the price doesn’t touch a certain level at any point before expiration
  • Digital SPOT – You receive a payout if the price is above or below a certain level at expiration
  • Double one-touch SPOT – You receive a payout if the price touches one of two set levels.
  • Double no-touch SPOT – You receive a payout if the price doesn’t touch any of the two set levels.

 
There are a few things that must be considered by the trader when considering trading these types of options.  The big one is that these options cannot be traded after the initial transaction.  There is no secondary market for these options.  Just like regular options, the timing of the expiration could be problematic.  You could ultimately be correct in your analysis of a set-up, but did not purchase enough time for you to ultimately be correct.  Also, may of the “exchanges” that offer this type of trading are based outside of the U.S. and thus not regulated by the CFTC, NFA, SEC nor FINRA.  Buyer beware.
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Learn more about options trading at Trading Advantage