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Currency Options - A favourite tool for currency traders

Currency options are becoming increasingly favourite amongst the currency traders because of their ease of trade. Currency options trading is popular among traders for a variety of reasons. The main advantageous factor in the Currency Options market is that we can take any type of view in the market. It can be slightly bullish, bearish, highly bullish, bearish, Volatile, Rangebound, etc. In Currency Options we have Monthly and Weekly contracts providing many strike prices to trade.  Weekly and monthly Currency Option contracts help traders in making spread strategies between different expiries.

Currency Option buyers have limited downside risk, as they can only lose the premium, they paid to purchase the options, but they have a limitless gain potential. FX options trading is used by certain traders to hedge open positions in the currency futures. Traders also enjoy forex options trading since it allows them to trade and profit based on market direction predictions based on economic, political, or other news.

The NSE was the first exchange to receive in-principal approval for a currency derivatives segment from SEBI. The exchange launched its currency futures trading platform on August 29, 2008. The Indian rupee was authorized to trade against foreign currencies such as the euro, pound sterling, and the Japanese yen once currency futures on the USD-INR were introduced for trading. Currency Options were introduced on October 29, 2010.

In the financial year 2020-21, the total number of contracts—including futures and options—traded on NSE and BSE were 2286 million contracts, which includes 1270 million contracts of options and 1016 million contracts of futures. This shows that the currency options volumes were higher by 25% of futures contract. The basic reason for the popularity of options contracts was the availability of weekly as well as monthly contracts making it the most useful tool for all the market participants in general and exporters and importers. The robust growth of the currency derivatives grew in FY 2022 also with a total number of contracts traded on both NSE and BSE totalling 2410 million contracts that too in the first 9 months of the FY 2022 including 876 million futures contract and 1533 million options contract. Since the beginning of April 2021, the currency options trading is outpacing the futures contracts and it is more than double of futures. Surprisingly, currency options volume witnessed a stupendous growth in December 2021 at 263 million options contracts against 127 million futures contracts. Like the volume of exchange, open interest also showcasing a tremendous growth month over month thereby attracting more and more investors to trade in the currency options.

Participation

Currency options are getting increased participation from financial market traders as the currency is showing a healthy volatile movement. Also, the importers and exporters are increasingly using exchange-traded currency options as most of their banks do not run an options book and offer same to their customers in OTC markets. MNC, Pvt Sector and large PSU banks offer currency options to select corporates, but there is a huge disparity in pricing and are not transparent. Exchange Traded Currency Options are growing because of price transparency with nationwide online trading platform. 

Exchange-traded currency options are cash-settled contracts same as that of futures, the participants need not to submit their forex exposure as the case in the OTC market. Further, the profit and gain from the currency futures and options can be offset with the profit and loss in the physical market. 

Also Read: 10 main benefits of trading in the Currency Market

Summary

Currency Options are gaining traction with retail traders because of low premiums in case of buying of options or low margin money (as low as just 3%) in case of option sellers. The importer must submit his exposure to the banks to book his forward rate against his import order in the OTC market, which is not the case with exchange-traded currency derivatives. Options are also gaining popularity among investors, traders, importers, and exporters. Short-term hedging or trading can be done with the availability of weekly options expiring every Friday.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.