Pat asked:
Anybody can tell me how options affect the currency exchange market? Is that really affect the market only when exercising? Makes an exercise of an option change occurs at the same time as a sale of the option? (I understand that when the option expires, then you must make a profit selling it) OK, for more clarification, my understanding is that, when exercising an option, opening a position in the price. But I do not know if the open position must be closed immediately. Correct me if I am wrong.
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Typically, what happens is you will be given the difference between the strike price and the current market price, as clearly the Writer of the Option cannot physically deliver a curreny pair at an older, lesser price than the market. So they owe to indemnify you, or place in you in a financial position similar to that as if you have the currency pair at the current market value.
Now as for option contracts, YOU DO NOT need to exercise them if they are about to expire. That would make no sense, as if they are ‘out-the-money’ you would lose money. A contract can expire, leaving you out the contract’s premium.
Hope this helped
Options come in many flavors but two are most significant:
1) institutional options – those that are traded by financial institutions to hedge for risk exposure
2) standardized options – those that are traded by speculative retail investors to profit on changes in the underlying asset.
When institutional options are placed with a market maker or through a broker to a market maker, their price reflects the market maker’s perceived risk of holding themselves out as a counterparty. Although the option itself may not move the price of the currency, at the exercise date, if there is considerable delivery of the underlying asset, then at that time, currency prices can change as product is bought or sold.
Standardized options enable a trader to buy and sell the option without waiting for expiration or exercise. Their price typically reflects a model of values so they can be reliably and predictably priced by the market maker. They are popular and well understood in the market as they are used in both commodities and in equities.
FX Bridge Technologies is a software provider for same-account Forex Options and Spot trading specifically geared to the retail trader wanting standardized options. We offer the trading platform for dealers and traders. The ProTrader Plus front end trade station has pre-trade utilities such as a the Strategy Optimizer ™, margin calculator and option calculator and post-trade utility such as the Risk Manager ™. For more information, visit http://www.fxbridge.com.