How To Use FX Options in Forex Trading

Foreign exchange options are a relative unknown in the retail currency world. Although some brokers offer this alternative to spot trading, most don’t. This means that many forex investors and traders are missing out.

FX options can be a great way to diversify and even hedge an investor’s spot position. Or, they can also be used to speculate on long- or short-term market views rather than trading in the currency spot market.

Key Takeaways

• Foreign exchange options are similar to equity options—they allow traders to place bets on future prices without purchasing the currency itself.
• The simplest currency options are call and put options, giving the right to buy or sell a currency in the future at a certain price.
• Like equity options, forex traders can combine several options contracts to create spread trades or straddles.

Understanding Forex Options

Structuring trades in currency options is actually very similar to doing so in equity options. Putting aside complicated models and math, let’s take a look at some basic FX option setups that are used by both novice and experienced traders.

Basic options strategies always start with plain vanilla options. This strategy is the easiest and simplest trade, with the trader buying an outright call or put option in order to express a directional view of the exchange rate.

Placing an outright or naked option position is one of the easiest strategies when it comes to FX options.

Basic Use of a Currency Option

As an example of how to use forex options, consider the following chart of the AUD/USD pair. We can see resistance formed just below the key 1.0200 AUD/USD exchange rate at the beginning of February, confirmed by the technical double top formation. This is a great time for a put option. An FX trader looking to short the Australian dollar against the U.S. dollar simply buys a plain vanilla put option like the one below:

ISE Options Ticker Symbol: AUM
Spot Rate: 1.0186
Long Position (buying an in the money put option): 1 contract February 1.0200 @ 120 pips
Maximum Loss: Premium of 120 pips

Profit potential for this trade is infinite. But in this case, the trade should be set to exit at 0.9950—the next major support barrier for a maximum profit of 250 pips.

ISE Options Ticker Symbol: AUM
Spot Rate: 1.0186
Long Position (buying an in the money put option): 1 contract February 1.0200 @ 120 pips
Maximum Loss: Premium of 120 pips

Profit potential for this trade is infinite. But in this case, the trade should be set to exit at 0.9950—the next major support barrier for a maximum profit of 250 pips.

The Debit Spread Trade

Aside from trading a plain vanilla option, an FX trader can also create a spread trade. Preferred by traders, spread trades are a bit more complicated but they do become easier with practice.

The first of these spread trades is the debit spread, also known as the bull call or bear put. Here, the trader is confident of the exchange rate’s direction, but wants to play it a bit safer (with a little less risk).

In the chart below, we see an 81.65 support level emerging in the USD/JPY exchange rate in the beginning of March.

This is a perfect opportunity to place a bull call spread because the price level will likely find some support and climb.Implementing a bull call debit spread would look something like this:

ISE Options Ticker Symbol: YUK
Spot Rate: 81.75
Long Position (buying an in the money call option): 1 contract March 81.50 @ 183 pips
Short Position (selling an out of the money call option): 1 contract March 82.50 @ 135 pips

Net Debit: -183+135 = -48 pips (the maximum loss)

Gross Profit Potential: (82.50 – 81.50) x 10,000 (units per contract) x 0.01 pip = 100 pips

If the USD/JPY currency exchange rate crosses 82.50, the trade stands to profit by 52 pips (100 pips – 48 pips (net debit) = 52 pips)

$890 billion

The size of the global forex market in 2025, according to research by Mordor Intelligence.

The Credit Spread Trade

The approach is similar for a credit spread. But instead of paying out the premium, the currency option trader is looking to profit from the premium through the spread while maintaining a trade direction. This strategy is sometimes referred to as a bull put or bear call spread.

Now, let’s refer back to our USD/JPY exchange rate example.

With support at 81.65 and a bullish opinion of the U.S. dollar against the Japanese yen, a trader can implement a bull put strategy in order to capture any upside potential in the currency pair. So, the trade would be broken down like this:

ISE Options Ticker Symbol: YUK
Spot Rate: 81.75
Short Position (selling in the money put option): 1 contract March 82.50 @ 143 pips
Long Position (buying an out of the money put option): 1 contract March 80.50 @ 7 pips

Net Credit: 143 – 7 = 136 pips (the maximum gain)

Potential Loss: (82.50 – 80.50) x 10,000 (units per contract) x 0.01 pip = 200 pips
200 pips – 136 pips (net credit) = 64 pips (maximum loss)

As anyone can see, it’s a great strategy to implement when a trader is bullish in a bear market. Not only is the trader gaining from the option premium, but they are also avoiding the use of any real cash to implement it.

Both sets of strategies are great for directional plays.

Option Straddle

So, what happens if the trader is neutral against the currency, but expects a short-term change in volatility? Similar to comparable equity options plays, currency traders will construct an option straddle strategy. These are great trades for the FX portfolio in order to capture a potential breakout move or lulled pause in the exchange rate.

The straddle is a bit simpler to set up compared to credit or debit spread trades. In a straddle, the trader knows that a breakout is imminent, but the direction is unclear. In this case, it’s best to buy both a call and a put in order to capture the breakout.

The figure below exhibits a great straddle opportunity.

Seen above, the USD/JPY exchange rate dropped to just below 82.00 in February and remained in a 50-pip range for the next couple of sessions. Will the spot rate continue lower? Or is this consolidation coming before a move higher? Since we don’t know, the best bet would be to apply a straddle similar to the one below:

ISE Options Ticker Symbol: YUK
Spot Rate: 82.00
Long Position (buying at the money put option): 1 contract March 82 @ 45 pips
Long Position (buying at the money call option): 1 contract March 82 @ 50 pips

It is very important that the strike price and expiration are the same. If they are different, this could increase the cost of the trade and decrease the likelihood of a profitable setup.

Net Debit: 95 pips (also the maximum loss)

The potential profit is infinite – similar to the vanilla option. The difference is that one of the options will expire worthless, while the other can be traded for a profit. In our example, the put option expires worthless (-45 pips), while our call option increases in value as the spot rate rises to just under 83.50 – giving us a net 55 pip profit (150 pip profit – 95 pip option premiums = 55 pips).

What Is the 90% Rule in Forex?

In foreign exchange markets, the 90% rule asserts that 90% of new forex day traders will fail to make money. Some versions are even more specific, claiming that 90% of day traders will lose 90% of their capital within the first 90 days. Although the evidence is largely anecdotal, the 90% rule serves as a cautionary idiom for the volatility and complexity of foreign exchange markets.

Which Forex Brokers Offer Options?

Many of the best forex brokers offer options trades, including IG, CMC Markets, and AvaTrade. It is important to note that options trades are significantly more complex than typical spot trades, and investors must be aware of the risks before attempting an options strategy.

What Is the Difference Between Options and Futures?

Options are similar to futures contracts, in that both allow market participants to lock in a desirable price and reduce the risk of short-term volatility. The difference is that an options contract gives the buyer the right, but not the obligation, to sell the underlying asset at a certain price on a certain date. A futures contract gives both the right and the obligation to trade the asset at the agreed-upon price, whether or not that price is favorable compared to the prevailing market price.

The Bottom Line

Foreign exchange options are a great instrument to trade and invest in. Not only can an investor use a simple vanilla call or put for hedging, they can also refer to speculative spread trades when capturing market direction. However you use them, currency options are another versatile tool for forex traders.