Are Forex Options Leveraged?

[DallasSteve]

Please forgive me if this has been asked and answered before, but I can't find it with the search function.

I've traded options before with US stocks and I understand that if I buy 1 contract for 100 shares priced at $.50 they are going to charge me $50 plus commission. Is that basically the same for forex? For example, I was looking at options on CME for EUR. One contract covers 125,000 of Euros. If I buy one contract at a price of .0010 do they charge my account $125 plus commission? Is that the most that I can lose on that position or am I somehow leveraged 50:1 like a regular forex trade and I can lose a lot more than $125?

Thanks

Steve

 

[riskarb]

Please forgive me if this has been asked and answered before, but I can't find it with the search function.

I've traded options before with US stocks and I understand that if I buy 1 contract for 100 shares priced at $.50 they are going to charge me $50 plus commission. Is that basically the same for forex? For example, I was looking at options on CME for EUR. One contract covers 125,000 of Euros. If I buy one contract at a price of .0010 do they charge my account $125 plus commission? Is that the most that I can lose on that position or am I somehow leveraged 50:1 like a regular forex trade and I can lose a lot more than $125?

Thanks

Steve

It works a bit differently at the CME under SPAN. The initial req is the debit, but limited to the overnight requirement on the underlying futures contract; i.e., a deep itm call or put is the futures requirement if premium > futures margin.

 

[DallasSteve]

riskarb

Thanks for the reply, but I don't understand. I tried looking at CME's SPAN explanation and it made my brain hurt. Is there an easy answer? I won't be trading deep in-the-money options. I would be trading out-of-the-money options, if I decide to trade. Is my exposure on currency options greater than the original "debit"? With stock options I think my exposure is only the original debit. Correct?

Thanks

Steve

 

[riskarb]

riskarb

Thanks for the reply, but I don't understand. I tried looking at CME's SPAN explanation and it made my brain hurt. Is there an easy answer? I won't be trading deep in-the-money options. I would be trading out-of-the-money options, if I decide to trade. Is my exposure on currency options greater than the original "debit"? With stock options I think my exposure is only the original debit. Correct?

Thanks

Steve

Long or short premium:

1.25C at .1200 premium = overnight requirement on futures
1.40C at .0022 premium = 22 x 12.50

The 1.25C premium exceeds the overnight req to hold one futures contract, so you need to post the lesser of the two.