The party buying the currency options contract (also known as buyer or “holder”) may choose to either sell it before the expiration date or keep it until the expiration date (in which case in expires worthless). If the buyer decides to sell the contract before expiry, he/she exercises his/her right to take a position in the underlying spot market. On our options trading platform, as soon as the buyer exercises his right (to buy or sell the currency), his position is liquidated for immediate payout. If the market has moved in his favor, then he takes in the difference between the market price and the strike price. If the market has moved against him, the position is just closed he has already paid and lost the premium.
The buyer’s only financial obligation is thus the premium he must pay to the seller. On the expiration date, a call buyer may exercise his/her right to buy the underlying spot position at the strike price, while a put buyer may exercise his/her right to sell the underlying spot position at the strike price. However, buyers often sell the currency options contract before the expiration date. In options trading, there is no limit to the possible profit of the buyer.
If the buyer exercises his right, the party selling the currency options contract (also known as seller or writer) is obligated to take the opposite underlying exchange rate spot position. The idea is that the premium paid by the buyer will cover the risk in case the seller is forced to take an adverse position on the underlying spot market.
When trading options, there must be enough money in the forex option seller’s account to cover the initial margin requirement. If the market moves against the seller, he/she might be required to add funds to his account to keep the balance above the margin requirement. The most profit the writer (seller) can make is the value of the premium received from the buyer. On the other hand, there is no limit to his possible loss.
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