Buying and Selling Forex Call Options

Along with put options, call options – please remember that those are two separate contracts, and not the other side of the same transaction – have been categorized as forex vanilla options to distinguish them from exotic options. Traders can now sell or buy put and call currency options through our online forex trading platform.

Call options defined

Call options refer to one of two standard forms of options (the second being put options), also known as vanilla options. When buying a call option, traders must pay a premium for the right to purchase ("call in") the underlying currency at a specified rate (strike price) and within a specified time period (before or on the expiration date). If the market has moved in his/her favor – a price increase in the case of a call option – the buyer will profit by exercising his/her right to buy the underlying currency and receive the option value from the option seller. On the other side of the transaction, the option seller receives the premium.

Buying a call option

A forex call options contract gives the buyer the right to buy a predetermined amount of currency from the options contract seller at a set rate (the "strike price") and within a specific time. The holder of the option will thus decide to buy or not to buy according to the progression of the market and the profitability of the option. In the case of a regular call option, the buyer believes that the rate will go up and will want to buy the currency at lower price. For that right, he will pay the premium.

The following diagram shows the possible payoff of a call option buyer:
P&L refers to Profit and Loss.

The current rate of the EUR/USD is 1.3450. You believe that the rate will rise and thus want to benefit from a lower rate. You buy a call option on a lot ($100,000) of EUR/USD at the strike price of 1.3460 in 30 days.

Enter these parameters when placing your option order on the Finotec Trading Platform. The premium is automatically calculated by your online trading platform. Let’s say you pay a premium of $500* for this option.

• You were right, the price rises to 1.3520, and you exercise your right to buy at the strike price on the expiry. Your profit is equal to = $10 (value of one pip) x (market price-strike price, in pips) – premium = 10 x (520-460) – 500 = $100*
• You were wrong and the rate drops to 1.3400. The option expires worthless and you lose the premium. On the opposite side of the transaction (see "Selling a call option,") the seller receives the premium.

You believe that the asset will go down before or on the expiry date; therefore you’ll want to sell it to whoever believes that the currency will go up and in exchange for the option you receive the premium.

The possible scenarios are the opposite of the outcomes mentioned above for buying a call option:

• If the rate does decrease before the expiration date, then you were right and you have earned the premium.
• If you were wrong and the price went up as expected by the buyer, you may lose the premium and even the difference between the underlying spot rate and the strike price (There is no limit to the loss the seller may sustain).

*The amounts displayed are for demonstration purposes only and option prices as well as delta, vega and market volatility may change at the discretion of your broker.