Different Types of Option Contracts
Sixty Ninth session of Forex Training
Welcome back to Forex professional training in financial markets.
In this session we will talk about Different Types of Option Contracts.
Although our major focus is on Option, we will also introduce Option in detail.
There are two types of Option: European and American.
In this Option, traders have to wait until the expiration time of the contract.
The contract can be implemented only if the expiration time has been reached.
It is the most common type of Option that can be implemented between the start date of the contract and the expiration time.
Option providers represent numerous kinds of Option based on their clients demand.
Granted that the simplest types are the most common trading methods.
Options are categorised based on different features.
One category is based on profit/risk rate of a trading type. Consequently, the riskier one inevitably has more catchy profit rate.
Profit of the most popular and simplest ones are between 40% and 80% of the Premium, while the most complex ones may have profit over 500% of the Premium.
The higher strike price you choose on a contract, the higher the amount of profit.
If you choose a ladder type of trading, farther level of strike price is more lucrative rather than the closer level.
The most common category, in which Options are arranged, is based on the movement of strike price during the contract time.
Up/Down, Classic High/Low, Call/Put
Known as the easiest and the most prevalent trading type of Option, where trader predicts direction of the price movement from the current price.
If a Call is purchased then the price must go up from the current price at the end of expiration time, so that profit is attained.
The Payout on this type is between 40% and 90%. More gap between strike price and current price, plus unpredictability.
Due to its more intricate case rather than Call/Put, the payout on this type of trading is more than 100% of the Premium that even rises to 1200%.
In this kind, trader must determine the strike price (target price).
If the price stands on or crosses the strike price at the end of expiration time, the profit is derived.
For instance, a trader anticipates that the strike price is 25 pips higher than the current price with 1 day expiration time.
If on the expiration time, price stands on or crosses the target price then trader will succeed in their contract.
Range, Channel, Tunnel, Boundary, Level
Despite different names, the concept of trading is still the same, traders have to determine a region that price fluctuates inside or outside.
This type is divided into two type: an Inside Range (In-Range) and an Outside Range (Out-Range).
Considering that an asset has a monotonic motion, trader may speculate that a contract with 1 week expiration time would be successful.
An area, with higher and lower edge price from the current price, must be specified.
If at the expiration time, price does not cross boundaries of the defined area, then a trader gains profit, otherwise they would lose the Premium and the deal.
While some Option providers permit traders to select high and low boundaries of the region, others represent a predefined edge of the area that price must move within.
Area with tighter borders leads to higher amount of Payout, from 10% to 600%.
Unlike In-Range type, price must cross the boundary of specified area and stay outside of the region at the expiration time.
This kind is lucrative on highly volatile assets, especially when there would be an efficacious event or announcement during the contract time.
Payout of this type would be from 50% to 700% based on the gap between the edge prices, plus subsequent results from a key pertinent meeting during the contract.
Ladder is one of the most recent types, represented by providers such as IGMarkets and GOptions.
Strike prices (Target price) with different levels and various payout amounts can be represented in predefined rates, otherwise traders can specify the levels and rates.
Undoubtedly, the closer rates have less Payout rather than farther levels.
To derive specified profit from the contract, price must cross and leave behind the given level at the end of expiration.
It may resemble the resistance and support levels of an asset, however, expiration time must be considered as well.
Pivot points are beneficial when a trader asks to deal a contract on this type.
Payout would be from 60% to 400% touched by the level value plus expiration time.
This kind of contract has one or two price levels, which determine the success or failure of a deal.
Following subtypes clarifies the contract conditions that must have been fulfilled for a profitable deal.
Price must at least reach the strike price once before the expiration time.
It does not matter if the price crosses or touches the strike price multiple times, the profit is achieved from this contract.
If the strike price is touched or met even once throughout the duration of the contract, trader will lose the deal and, consequently, the Premium.
Double One Touch
It is similar to One Touch method, however, there are two strike price, one higher than the current price and the other one is lower.
Even if the price hits any of the strike prices during the contract time, deal would be successful for the trader.
Double No Touch
Unlike Double One Touch, Price must never meet the strike prices, which are above and below the current price, during the contract.
Even one hit of any strike levels causes the contract loss.
Price Action technique, explained in Forex Trading section, is useful when trader is dealing with this form of contract.
Payout would be 30% to 480% mostly affected by the strike and current price gap.
A rare method of trading Option in which trader must compare two independent assets and specify which one would have a higher price change on an equal contract time.
Payout of Pair Option model is from 50% to 90%.
That concludes this session, until next time and another session take care.