What are Your Options Regarding Forex Options Brokers?
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
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
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
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
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
John Nobile - Senior Account Executive
CFOS/FX - Online
Forex Spot and Options Brokerage
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