Forex options trading is one of the lesser-known derivatives in India. It is also known as currency options trading. Multinational corporations use forex options trading as a hedging tool to protect their currency exposure.
However, retail traders like you can also trade forex options contracts based on your trading objective. This blog will help you start forex options trading in India. Let’s brush up on the basics first.
What is Forex Options Trading?
Forex means foreign exchange or FX, a marketplace where one currency is exchanged for another. The exchange of foreign currencies happens at a rate that is decided by several factors, primarily economic factors like inflation, interest rates, and others.
Normally, you’d go to a bank or financial institution to exchange one currency for another. But what about traders who simply want to benefit from the difference between exchange rates? This is where currency derivatives like forex options come into play.
Those who trade forex options obtain the right to buy or sell the underlying currency pair at a pre-determined price and date. But options are not an obligation, meaning the buyer of an option may choose to not exercise a contract come the expiry day.
There are seven types of currency pairs for trading in India, but only 4 pairs have tradeable and liquid options contracts. Other than that, these are the finer details that you should know about India’s forex options contracts:
- Option Type: Only European Options are allowed for trading in India.
- Lot Size: The forex lot size varies but is typically 1000 to 100,000
- Expiry: There are 11 serial weekly contracts, monthly contracts expiring on Fridays, 3 serial monthly contracts, and 3 quarterly contracts which expire in March, June, September, and December.
- Option Premium: The option premium is quoted in Indian Rupees. The buyer of the contract has to pay the option premium in cash on T+1 day.
- Margin Requirement: The options trading margin may change as per SPAN requirements. SPAN is determined on the basis of volatility in the markets.
Types of Forex Options
Forex Options can be categorized on the basis of the underlying transaction which is as follows.
- Call Options: The call option gives the holder the right but not the obligation to buy the specific currency at a predetermined rate until the expiry. Here the buyer will benefit from the rise in the price of the underlying currency.
- Put Options: Put option gives the holder the right but not an obligation to sell the specific currency at a predetermined rate until the expiry. Here the buyer will benefit from the downward movement in the price of the underlying currency.
Forex Options can also be categorized on the basis of when they are exercised:
- European Options: European Options are ones that can be exercised only on maturity or expiry. It’s not possible to exercise them before that.
- American Options: American Options are ones that can be exercised at any time before the expiry. You can square off the position at any time during the contract period and can take advantage of the current situation.
How to Start Forex Options Trading in India?
Now that the basics are clear, let’s get into how to start forex trading. An option buyer or seller can trade in forex options trading in India. You can trade through a broker who has a mobile trading app like Dhan.
All you have to do is open an account and activate the derivatives segment. The best part about trading on Dhan is that you can use a single account to trade in all segments, including currency futures and options.
There are likely to be margin requirements, which need to be followed to trade currency options in India. In India, you can trade in 4 currency pairs:
The currency market is active for 24 hours around the globe for five days from Monday to Friday. The forex market hours in India are from 9 AM to 5 PM.
The market remains closed on Saturday and Sunday. The positions can be squared off by buying or selling forex options even before the expiry.
Benefits of Forex Options Trading
The top three benefits of currency options trading are as follows.
1. Low Entry Cost
The cost of entry is very low since forex derivatives are highly leveraged instruments. Unlike the stock market, you don’t need to invest a huge amount to enter forex options trading but just a small premium has to be paid.
2. Risk Coverage
If you are running the business in multiple countries then foreign options trading gives you the option to reduce the risk of fluctuations in foreign exchange. You can also protect yourself from ups and downs in currency due to global events.
That said, you must have the best forex trading strategies up your sleeve in order to not just survive but thrive in the currency market.
For the buyer of the call option and seller of the put option, it’s not necessary to exercise the contract if the trade is not favorable, which provides them with great flexibility.
Forex options trading is a derivative trading instrument in India, which provides traders with an opportunity to benefit from global economic and geopolitical events. You can start forex options trading via Dhan with incredible features!