What are Your Options Regarding Forex Options Brokers?

Forex option brokers can generally be divided into two separate categories:
forex brokers who offer online forex option trading platforms and forex
brokers who only broker forex option trading via telephone trades placed
through a dealing/brokerage desk. A few forex option brokers offer both
online forex option trading as well a dealing/brokerage desk for investors
who prefer to place orders through a live forex option broker.

The trading account minimums required by different forex option brokers vary
from a few thousand dollars to over fifty thousand dollars. Also, forex
option brokers may require investors to trade forex options contracts having
minimum notional values (contract sizes) up to $500,000. Last, but not
least, certain types of forex option contracts can be entered into and
exited at any time while other types of forex option contracts lock you in
until expiration or settlement. Depending on the type of forex option
contract you enter into, you might get stuck the wrong way with an option
contract that you can not trade out of. Before trading, investors should
inquire with their forex option brokers about initial trading account
minimums, required contract size minimums and contract liquidity.

There are a number of different forex option trading products offered to
investors by forex option brokers. We believe it is extremely important for
investors to understand the distinctly different risk characteristics of
each of the forex option trading products mentioned below that are offered
by firms that broker forex options.

Plain Vanilla Forex Options Broker - Plain vanilla options generally refer
to standard put and call option contracts traded through an exchange
(however, in the case of forex option trading, plain vanilla options would
refer to the standard, generic option contracts that are traded through an
over-the-counter (OTC) forex dealer or clearinghouse). In simplest terms,
vanilla forex options would be defined as the buying or selling of a
standard forex call option contract or forex put option contract.

There are only a few forex option broker/dealers who offer plain vanilla
forex options online with real-time streaming quotes 24 hours a day. Most
forex option brokers and banks only broker forex options via telephone.
Vanilla forex options for major currencies have good liquidity and you can
easily enter the market long or short, or exit the market any time day or
night.

Vanilla forex option contracts can be used in combination with each other
and/or with spot forex contracts to form a basic strategy such as writing a
covered call, or much more complex forex trading strategies such as
butterflies, strangles, ratio spreads, synthetics, etc. Also, plain vanilla
options are often the basis of forex option trading strategies known as
exotic options.

Exotic Forex Options Broker - First, it is important to note that there a
couple of different forex definitions for "exotic" and we don't want anyone
getting confused. The first definition of a forex "exotic" refers to any
individual currency that is less broadly traded than the major currencies.
The second forex definition for "exotic" is the one we refer to on this
website - a forex option contract (trading strategy) that is a derivative of
a standard vanilla forex option contract.

To understand what makes an exotic forex option "exotic," you must first
understand what makes a forex option "non-vanilla." Plain vanilla forex
options have a definitive expiration structure, payout structure and payout
amount. Exotic forex option contracts may have a change in one or all of the
above features of a vanilla forex option. It is important to note that
exotic options, since they are often tailored to a specific's investor's
needs by an exotic forex options broker, are generally not very liquid, if
at all.

Exotic forex options are generally traded by commercial and institutional
investors rather than retail forex traders, so we won't spend too much time
covering exotic forex options brokers. Examples of exotic forex options
would include Asian options (average price options or "APO's"), barrier
options (payout depends on whether or not the underlying reaches a certain
price level or not), baskets (payout depends on more than one currency or a
"basket" of currencies), binary options (the payout is cash-or-nothing if
underlying does not reach strike price), lookback options (payout is based
on maximum or minimum price reached during life of the contract), compound
options (options on options with multiple strikes and exercise dates),
spread options, chooser options, packages and so on. Exotic options can be
tailored to a specific trader's needs, therefore, exotic options contract
types change and evolve over time to suit those ever-changing needs.

Since exotic forex options contracts are usually specifically tailored to an
individual investor, most of the exotic options business in transacted over
the telephone through forex option brokers. There are, however, a handful of
forex option brokers who offer "if touched" forex options or "single
payment" forex options contracts online whereby an investor can specify an
amount he or she is willing to risk in exchange for a specified payout
amount if the underlying price reaches a certain strike price (price level).
These transactions offered by legitimate online forex brokers can be
considered a type of "exotic" option. However, we have noticed that the
premiums charged for these types of contracts can be higher than plain
vanilla option contracts with similar strike prices and you can not sell out
of the option position once you have purchased this type of option - you can
only attempt to offset the position with a separate risk management
strategy. As a trade-off for getting to choose the dollar amount you want to
risk and the payout you wish to receive, you pay a premium and sacrifice
liquidity. We would encourage investors to compare premiums before investing
in these kinds of options and also make sure the brokerage firm is
reputable.

Again, it is fairly easy and liquid to enter into an exotic forex option
contract but it is important to note that depending on the type of exotic
option contract, there may be little to no liquidity at all if you wanted to
exit the position.

Firms Offering Forex Option "Betting" - A number of new firms have popped up
over the last year offering forex "betting." Though some may be legitimate,
a number of these firms are either off-shore entities or located in some
other remote location. We generally do not consider these to be forex
brokerage firms. Many do not appear to be regulated by any government agency
and we strongly suggest investors perform due diligence before investing
with any forex betting firms. Invest at your own risk with these firms.

John Nobile - Senior Account Executive
CFOS/FX - Online Forex Spot and Options Brokerage