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New investors who are trying their hand in the foreign exchange market should know that they have several options when trading. These FOREX options give investors/retailers a number of opportunities to reduce their risk or increase their profit.

Basically, there are two types of foreign exchange options: the call/put option (which is the more traditional option), or the SPOT option (single payment option trading). While the call/put option is more traditional, the SPOT option is what retailers would call a more flexible option.

In traditional options, the buyer is allowed the right to buy something from the seller at a fixed time and price. For instance, a FOREX trader might buy two lots of EUR/USD at 1.300 in a month. This is what is called the “EUR call/USD put.” If the EUR/USD price goes below 1.300, the buyer loses the premium because the contract expires and becomes worthless. However, if the price is higher than 1.300, then the buyer can use this option and have two lots for 1.300. He can then sell these lots for profit.

In the SPOT option, the trader offers a scenario (“EUR/USD for 1.300 in twelve days”), gets a premium quote, and then gets a payout if that specific scenario takes place. Basically, the SPOT option will automatically convert the trader’s option to cash if the trade is successful, giving the trader a payout.

While FOREX options are a good way of profiting in the market without increasing risks, a trader will still need to understand thoroughly how these options work, even to the smallest detail. In that way, they are fully prepared in whatever option they plan to use.