For the past several years, the foreign currency exchange market has turned out to be one of the most profitable and risky investment options. Investors around the world have started trading the forex market using different and empowering way such as forex options to reach their personal financial goal. Indian traders are among those new participants in the forex options market who aim to do a lot more than simply follow price direction. India’s economy has proved its resilience many times in the past and even today it is on its way to reaching new heights that represents a long-awaited recovery. Let us unpack everything you need to know about forex options trading in India.
What Are Options?
Options are everywhere around the world, and it can be easily understood as a contract that is sold by a party (known as the writer) to another (known as the holder). This contract empowers its buyer to buy/sell any financial asset at a predetermined price sometime in the future. When the tradable asset is a currency pair then it is called forex options. One should note that the buyer is not obligated to sell or to buy an asset once buying an options contract. Options contracts are like an insurance policy in a way that they are used to ensure the price of a chosen asset and the seller of this contract receives the value of options from the buyer just like a premium for insurance.
How Do Forex Options Work?
Millions of Indian traders and investors prefer to indulge in forex options as they offer a lot of trading potential, but it might seem a challenging task for first-timers. Learning more about how forex options work can level your way to starting your forex options trading journey. One could easily grasp the basics of how options work with the following example:
people who want to buy a certain product sometime in the future for example a car, there is often something called a down payment that serves as an initial investment towards your purchase. Once you have paid a specific amount, you could either buy the car at a lower price even though the market prices have risen, or you could choose not to proceed with the purchase which would result in losing the initial investment.
Reasons Why Indian Investors Should Trade Options
Except being a profitable and unique way to trade forex, people choose to trade options due to the following reasons:
- Buying an option limits the risk to the option’s value paid to the seller.
- Investors must pay a lesser amount in the case of forex options as compared to securing a forex position.
- Forex options traders can benefit from price movements occurring on either side by implementing suitable trading strategies.
- Forex options are a great tool for limiting risks and ensuring a forex deal that is already open
Types
Before you start with forex options trading through a broker of your choice, getting familiar with its various categories and sub-categories is crucial. The main categories that you will hear more commonly during forex options trading are:
- Vanilla or Traditional
As the name suggests, this is a more basic type of forex options trading method that is easier to understand and be utilised by beginners. Vanilla forex options bear resemblance with traditional stock categories and have two further sub-categories based on the type (call or put) or the style (American and European) of trading.
- Call and Put Options
Forex options are best known for their versatility as they could help traders predict market movements and safeguard their positions. A call option can be bought if a trader decides to take the advantage of rising share prices. It deals with the option to buy a certain fx pair at a time at a certain rate by the holder as it expires.
Just opposite to the above-mentioned call options, put options give holders of an options contract the right to sell a particular FX pair at a pre-fixed rate when it expires. This predetermined buy/sell price used by the holder of an option is known as the strike rate. During put option, holders stand a chance to profit when the markets fail.
- American and European
When we talk about flexible vanilla style FX options trading, it is usually the American one that is being mentioned. It is commonly exercised at the strike rate any time before the expiration date. These are far more profitable because one does not have to wait till the expiration date.
While the European style options have a feature that makes it exercisable only on the date expiration, neither before nor after. People who prefer less volatility, often choose the European style options by paying a lesser premium than American options.
- Exotic
More commonly known as SPOT options, these are forex options that require a single payment to start trading. Those who are new to the entire forex options trading scenario tend to exotic type options because these are not as complex as other categories. Exotic options can be further divided into 3 types:
- Barrier
- Asian
- Digital
Legal Concerns Regarding Forex Options Trading In India
India’s most prominent regulatory body known as the Securities Exchange Board of India (or SEBI) has placed many regulations for investors to consider. Before delving into anything that looks like an online opportunity to gain some profit, one should read the guidelines on SEBI’s official website. It is an undeniable fact that forex and forex options have become quite a popular sensation for Indian investors. But like global market participants, Indian forex traders are not safe from scam brokers and companies that make false promises to run pyramid schemes. People must be careful while they are choosing a forex options broker and find one that is properly regulated and has a solid background.
Best Forex Options Brokers in India
Fortunately, there are many reputed forex options brokers that accept Indian clients and operate legally.
Zerodha
Zerodha is a well-known broker operational in India which complies with all the necessary regulations and guidelines as per the SEBI. It works on a specific discount broking model that is both lesser-known and yet beneficial for investors looking for a place to begin forex options trading in India. It has a great track record of providing free equity delivery trading that proves its potential for both new and experienced traders interested in forex options.
Features:
- Zerodha is one of the leading zero delivery brokerage company based in India that works as a discount broker.
- According to its website, it offers 5x high exposure to its users.
- Solid research is available on this platform for the benefit of each client.
- Low broker charges are available with Zerodha’s broker platform.
- It has excellent charting tools, fundamental analysis, and an easily available support team.
Visit Zerodha for more information.
Angel Broking
If you wish to deal with a more traditional type of broker for trading forex options in India, then Angel Broking is a highly recommended place to start. The company was founded in the year 1987 and is still operates as one of the leading companies in this sector. As of now, Angel Broking has gathered millions of active users.
Features:
- Options trading rates vary but are quite affordable, unlike its alternative platforms.
- Angel Broking provides mobile and web-based trading to deliver a high-speed trading experience to its registered users.
- Users get up to 3x the exposure to active futures markets such as Nifty Futures.
- It has hundreds of support offices across the country to help clients with any issues.
- Opening a Demat account takes only minutes on Angel broking’s easy to access website.