3. 24 hour market

Foreign exchange market trading occurs over a 24 hour period picking up in Asia around 24:00 CET Sunday evening and coming to an end in the United States on Friday around 23:00 CET. Although ECNs (electronic communications networks) exist for stock markets and futures markets (like Globex) that supply after hours trading, liquidity is often low and prices offered can often be uncompetitive.

4. No Limit up / limit down

Futures markets contain certain constraints that limit the number and type of transactions a trader can make under certain price conditions. When the price of a certain currency rises or falls beyond a certain pre-determined daily level traders are restricted from initiating new positions and are limited only to liquidating existing positions if they so desire. This mechanism is meant to control daily price volatility but in effect since the futures currency market follows the spot market anyway, the following day the futures market may undergo what is called a 'gap' or in other words the futures price will re-adjust to the spot price the next day. In the OTC market no such trading constraints exist permitting the trader to truly implement his trading strategy to the fullest extent. Since a trader can protect his position from large unexpected price movements with stop-loss orders the high volatility in the spot market can be fully controlled.

5. Sell before you buy

Equity brokers offer very restrictive short-selling margin requirements to customers. This means that a customer does not possess the liquidity to be able to sell stock before he buys it. Margin wise, a trader has exactly the same capacity when initiating a selling or buying position in the spot market. In spot trading when you're selling one currency, you're necessarily buying another.

A disadvantage of SPOT options, however, is their higher premiums. On average, SPOT option premiums cost more than standard options.

Why Trade Options?

There are several reasons why options in general appeal to many traders:

Your downside risk is limited to the option premium (the amount you paid to purchase the option).

You have unlimited profit potential.

You pay less money up front than for a spot (cash) FOREX position.

You get to set the price and expiration date. (These are not predefined like those of options on futures.)

Options can be used to hedge against open spot (cash) positions in order to limit risk.

Without risking a lot of capital, you can use options to trade on predictions of market movements before fundamental events take place (such as economic reports or meetings).

SPOT options allow you many choices:
Standard options.
One-touch SPOT – You receive a payout if the price touches a certain level.
No-touch SPOT – You receive a payout if the price doesn't touch a certain level.
Digital SPOT – You receive a payout if the price is above or below a certain level.
Double one-touch SPOT – You receive a payout if the price touches one of two set levels.
Double no-touch SPOT – You receive a payout if the price doesn't touch any of the two set levels.
So, why isn't everyone using options? Well, there also are a few downsides to using them:

The premium varies according to the strike price and date of the option, so the risk/reward ratio varies. SPOT options cannot be traded: once you buy one, you can't change your mind and then sell it. It can be hard to predict the exact time period and price at which movements in the market may occur. You may be going against the odds.

Options Prices

Options have several factors that collectively determine their value: Intrinsic value - This is how much the option would be worth if it were to be exercised right now. The position of the current price in relation to the strike price can be described in one of three ways:
"In the money" - This means the strike price is higher than the current market price.
" Out of the money" – This means the strike price is lower than the current market price.
" At the money" – This means the strike price is at the current market price.
The time value - This represents the uncertainty of the price over time. Generally, the longer the time, the higher premium you pay because the time value is greater.
Interest rate differential - A change in interest rates affects the relationship between the strike of the option and the current market rate. This effect is often factored into the premium as a function of the time value.
Volatility - Higher volatility increases the likelihood of the market price hitting the strike price within a limited time period. Volatility is factored into the time value. Typically, more volatile currencies have higher options premiums.
How It Works – A Scenario
Say it's January 2, 2004, and you think that the EUR/USD (euro vs. dollar) pair, which is currently at 1.3000, is headed downward due to positive U.S. numbers; however, there are some major reports coming out soon that could cause significant volatility. You suspect this volatility will occur within the next two months, but you don't want to risk a cash position, so you decide to use options.

You then go to your broker and put in a request to buy a EUR put/USD call, commonly referred to as a "EUR put option," set at a strike price of 1.2900 and an expiry of March 2, 2004. The broker informs you that this option will cost 10 pips, so you gladly decide to buy.

This order would look something like this:
Buy: EUR put/USD call
Strike price: 1.2900
Expiration: 2 March 2004
Premium: 10 USD pips
Cash (spot) reference: 1.3000

Say the new reports come out and the EUR/USD pair falls to 1.2850--you decide to exercise your option, and the result gives you 40 USD pips profit (1.2900 – 1.2850 – 0.0010).