Forex using Options 2

In this paper we review common methods of trading the Forex markets, and examine a still-uncommon method
using Forex options, which offers several significant advantages over traditional methods. In this paper, I assume
a basic knowledge of trading the Forex spot market.
Trading the Forex market in any manner has many advantages over other markets (such as equities). It is highly
liquid, very large, almost impossible to manipulate, its volume driven mainly by commercial trade need (not
speculation), and the relevant data is transparent and easily available (except trade volume). However, there are
some real pitfalls. If we’re wrong directionally and the market finds us, losses can be severe, even at lower
leverages. A modicum of volatility is good for trading, as movement is what sustains a market. However, during
the last year volatilities have been enormous. With a 24/5 market, you can’t always be there to monitor positions.
The use of stops can prevent a blown account, but they also lock in losses, sometimes needlessly.
As we will see, trading Forex with options preserves much of the advantages of trading Forex, and eliminates
some of the downsides:
There is no leverage in the purchase of options. Sleep at night
There is no drawdown beyond the premium. Sleep at night
There is less time involved (no need to monitor positions often)
Trading with options avoids the paying of interest on leveraged positions- of special interest to Muslim
investors following Sharia law, who cannot pay interest (or even receive it on the Carry).
The upside is large and can return multiples of the premium. The main disadvantage to options is unlike a trade in
the underlying asset, options are time-limited.
Traditional Forex Trading
Traders use several methods to determine the future direction of an asset in order to take a position which should
become profitable if their prediction occurs.
• Scalping is a style of rapid, numerous daily trades, sometimes making use of spreads, sometimes making
use of news releases. Scalpers may only make 10-30 pips per trade, but with perhaps dozens of trades
per day can be profitable. Success depends on speed, accuracy, and a cooperative brokerage who
allows this type of trading.
• Momentum Trading, which uses exponential moving averages (EMA), or moving average convergencedivergence
(MACD) to measure market inertia and momentum, respectively. Momentum Traders may
hold their positions for minutes to
perhaps an entire day.
• Technical Trading is based on the
belief that patterns in historical
price action will predict future
price action. There are hundreds
of indicators, including Relative
Strength Indicator (RSI), MACD,