The very first things you need to grasp prior to trade forex options trading are the so-called call and put. Now let’s have a good focus on our discussion about call option. Call option is a right (not an obligation) to buy an asset at a certain price and within a certain time period. In the context of forex options trading the asset is a currency. This illustration will make you easily understand the concept of call option:
Mr. X is willing to buy a nice apartment which belongs to Mr. Y. In a meeting both of them have a deal that the price of the apartment is $75,000. However, at the time Mr. X doesn’t have enough cash to pay for it so he asks for Mr. Y to give him three more months. Then they make an agreement that Mr. X will give Mr. Y $5,000 as a down payment and Mr. X will give $75,000 three months from the agreement signed. So the total price of the apartment will be $80,000.
If Mr. X can’t eventually fulfill his promise then the down payment will be Mr. Y money. On the contrary, Mr. Y can’t sell the apartment to anyone else for any reasons as Mr. X already has had a right to buy the apartment.
Someday within the agreed-upon time period, there is news that right next to that apartment, a well-known developer will build the largest recreational park in the world. That news automatically lifts up the price of every buildings and lands nearby the site. Mr. X also gets the benefit as the price of the apartment now surges to $250,000. According the agreement, three months after they signed it, Mr. X can buy, as he has a right, the apartment for only $80,000 and now he has more money as the price of it rises.
That was a nice occurrence for Mr. X but what if a bad thing happens to that apartment, for instance, the security issues in that neighborhood is getting worse and causing the price of the apartment drops off significantly. If Mr. X eventually aborts his plan to buy the apartment then the biggest amount of losing money for Mr. X is only $5,000. Why? Because according to the agreement Mr. X has a right to buy it and if he cancels it he will lose his down payment given to Mr. Y.
Now you can understand the basic concept of call option in forex options trading. Just replace the apartment with the currency that you want to buy in forex options and then you can have similar situation as Mr. X has.