How FX Options are Traded

While currency options give the buyer the right to buy (Call Option) or sell (Put Option) the underlying currency at a certain price (known as the strike) on a certain date, there is no obligation to do so. However, the seller of the currency options is obligated to buy or sell the underlying currency in case the buyer decides to exercise the option.

For exercising the right to trade the underlying asset, the seller of the option is paid a price, known as premium. The price that is specified for either buying or selling at the future date is known as the strike price.When an investor believes that the US dollar will appreciate against the Euro, he purchases a currency call option on USD/EUR. If the value of the US dollar actually increases against the Euro, the buyer can exercise his right to earn a profit.

Example:

If you have a contract to buy EURUSD on June 1st at the price of 1.2000, you have the right (the option) to buy EURUSD on or before that date.
  • If the value of EURUSD is higher than USD 1.2000 on June 1st, you will profit from buying it because you can then turn around and sell it for more than 1.2000.
  • On the other hand, if EURUSD is less than 1.2000 on June 1st, you wouldn't want to buy the currency at the contract price, since you could instead buy EUR/USD at the market price.
Since an option gives you the right but not the obligation to either buy or sell an asset, you are entitled not to buy EURUSD if the price doesn't suit you.