FX Options
Trading FX Options
How to Trade FX Options
When trading FX Options, realize that you are basing your expected results on the relationship between two different currencies, depicted as a fraction separated by a backslash ("/"). To better comprehend the concept, we must understand how to read Foreign Exchange (Forex) quotes.
Currency options may be quoted in one of two ways: Dollar terms, in which a currency is quoted in terms of the U.S. dollar per unit of foreign currency; and Foreign currency terms (inverse terms), in which the dollar is quoted in terms of units of foreign currency per dollar. The same logic can be applied to currency pairs in which the U.S. dollar is not one of the currencies. Either currency can be expressed in terms of the other.
In Dollar terms, the first currency is your base, which always has a value of 1. When the base currency is the U.S. Dollar (USD), think of the quote as telling you what a U.S Dollar is worth in the second currency, the currency following the slash. Each quote is also multiplied by 100, since the quote represents a percentage of one currency to another.
For example:
USD/EUR = 76.96
In words, the above can be read as "It would cost 1 U.S. Dollar ($1) to buy €0.7696 Euros."
Now if we believe the value of the U.S. Dollar will go up relative to the Euro, (i.e. that the US Dollar will grow stronger than the Euro) we would buy calls on the U.S. Dollar relative to the Euro.
Just like equity options, FX Options have Option Roots for each of these currency pairs. Many ISE FX options are Dollar Relative which means the US Dollar is the base currency. Listed below are the current ISE FX option pairs:
ISE Dollar Term Option Roots
| Currency Relationship | Option Root |
| USD/JPY (Japanese Yen) | YUK |
| USD/CAD (Canadian Dollar) | CDD |
| USD/EUR (Euro) | EUI |
| USD/GBP (British Pound) | BPX |
| USD/AUD (Austrailian Dollar) | AUX |
| USD/CHF (Swiss Franc) | SFC |
| USD/BRL (Brazilian Real) | BRB |
| USD/MXN (Mexican Peso) | PZO |
| USD/NZD (New Zealand Dollar) | NZD |
| USD/SEK (Swedish Krona) | SKA |
As discussed, the U.S. Dollar can also be the currency that is being exchanged for foreign currencies, and therefore is the second figure. In this case, the quote is in Foreign currency terms, telling you how much it would cost in U.S. Dollars to buy one unit of the underlying foreign currency.
EUR/USD = 129.53
In words, the above can be read as “It would cost $1.2953 to buy 1 Euro (€1)”
The International Securities Exchange and NASDAQ Stock Exchange offer options with the quote is in Foreign currency terms. Listed below are some examples:
ISE Foreign Currency Terms Option Roots
| Currency Relationship | Option Root |
| EURUSD | EUU |
| GBPUSD | GBP |
| AUDUSD | AUM |
| NZDUSD | NDO |
NASDAQ Foreign Currency Terms Option Roots
| Currency Relationship | Option Root |
| USD/JPY | XDN |
| CAD/USD | XDC |
| EUR/USD | XDE |
| GBP/USD | XDB |
| AUD/USD | XDA |
| CHF/USD | XDS |