Since there’s so much involved to learn foreign exchange trading, beginning with foreign currency options is as good as any. Here is some of the industry’s terminology, and its ‘rules’ pertaining to options.
Any individual involved in FX, or foreign exchange, is called a speculator.
You don’t actually buy any currency to speculate in the foreign currency market. Instead, you can buy a foreign exchange or currency option contract. This contract gives you the right, but not the obligation, to buy or sell a specified amount of one currency for another at a specified price on a specified date.
The person who purchases the option is the called the buyer or holder, and the person who creates the option is the seller or writer. The price of the option is set by the seller and includes a premium that the buyer pays the seller in exchange for the right to buy or sell the currency at some future date. The price at which the option is bought is called the “strike price.”
To learn foreign exchange trading, you need to know about the two types of options
There are two types of options. A call option and a put option. A call option is the right, but not the obligation, to buy the underlying currency on a specified date. A put option is also the right, but not the obligation, to sell the currency on a specific date.
Options don’t have to be exercised. The holder can choose not to exercise his or her option. If the holder chooses not to exercise the option on the specified date, the option expires. The holder doesn’t have to come up with any funds on the specified date, but does lose any money spent to buy that option.
The buyer of the option only risks losing the amount of money he or she paid in premium to buy that option. The writer of the option’s risk is unbounded because he or she must come up with the underlying currency if the option’s buyer decides to exercise his or her right on the specified date in the contract – even if the cost of buying or selling that currency is considerably higher than when the option was originally written.