How leverage works (MODUL 5-9)

A number of firms are presently offering options on off-exchange foreign currency contracts. Buying and selling forex options present additional risks, many of which are similar to those inherent in buying options on exchange-traded futures contracts. NFA publishes a brochure called “Buying Options on Futures Contracts: A Guide to Their Uses and Risks” which discusses the mechanics and risks of options trading. The brochure can be downloaded from NFA’s Web site.

Most exchange-traded options can be exercised at any time before they expire. These are called American-style options. Many forex options are European-style options, which can be exercised only on or near the expiration date. In other words, you can’t take advantage of a favorable price move that occurs before the expiration date unless you can offset your position. You should understand which type of option you are purchasing.