- There are differences between spot and options trading and which to use depends on your strategy, time and appetite risk.
- Spot trading’s transactions are executed almost immediately while options are executed based on your deal’s date.
- Spot trading can be for short term to long term while option trading is usually a short-term trade.
Forex trading is one of the most popular ways to make money online today because traders can make a quick profit by exchanging currencies.
The two most commonly used forms of forex trading today are forex spot trading and options trading. If you’re interested in starting forex trading, you may be wondering which one is right for you. This article will show you the major differences between them and give you enough information to help you decide.
Difference #1: Physical exchange
Spot trading in the forex market is an exchange of currencies. For example, if you trade the EUR/GBP currency pair in the forex spot market, you will be asked to provide euros in exchange for British pounds.
Meanwhile, when participating in forex options trading, you are signing contracts with a party to trade a specific amount of a currency pair at a predetermined exchange rate by a given date. With options trading, you may not own underlying assets but still can benefit from their movements.
Difference #2: Trade execution
In forex spot trading, when you exchange one currency to another, your trade will be executed immediately or shortly thereafter. What about forex options trading? Unlike spot trading, the transactions will be carried out at a predetermined date in the future.
Difference #3: Trade duration
Forex spot traders are a diverse bunch. They can be long-term traders who buy and hold currencies for a very long time. They may also be mid-term traders who hold currencies for weeks. Or, they can be short-term traders, speculators, and scalpers.
Most forex options traders, however, are short-term. They usually close out their contracts before settlement and rarely trade currencies physically.
Forex spot vs options trade example
Suppose the EUR/USD’s exchange rate is currently at 1.3000. Forex spot traders predict that the euro will fall against the US dollar in the future. Therefore, they exchange their euros for American dollars. When the price decreases to 1.2000, these traders exchange their dollars for euros, and just like that, they make a profit of $0.1 for every euro exchanged.
On the other hand, when options traders predict that the EUR/USD’s exchange rate will fall, they open a Put order at 1.3000. In other words, they sign a contract with a broker that allows them to sell 1 euro for 1.3 US dollar at the end of the contract. If the EUR/USD falls to 1.2000 at the time when the contract ends, these traders can still exchange 1 Euro for 1.3 US Dollars following the deal they agreed with the broker.
Forex Options Trading
There are currently two popular types of forex options: Vanilla and Binary. They have several differences:
- Vanilla options allow you to buy or sell an underlying asset at a predetermined price on a specific date. Often, vanilla options are available from forex brokers.
- Binary options allow you to profit from predicting the direction of an underlying asset’s price. You place a Call order if you think an asset’s price will move up, and place a Put order if you think an asset’s price will move down. If your prediction is correct, you will receive a predetermined payout, usually 70 to 90% of your investment amount. However, if your prediction is wrong, you will lose the entire investment amount.
Those are the major differences between forex spot trading and options trading. Which one you use will depend on your approach to the forex market. Consider your time, strategy and trading personality to find the right form for you.