If you're into speculation on currencies, and have some risk capital at hand, consider currency options traded on the Philadelphia Stock Exchange. These are contracts that rise and fall with the value of major currencies. The contracts are available through your broker, as long as you are approved for option trading. Remember that currency options are highly leveraged, meaning you can use a little money to gain -- or lose -- a lot more.
The oldest stock exchange in the United States, the Philadelphia Stock Exchange became a branch of the National Association of Securities Dealers Automated Quotation system -- also known as NASDAQ -- in 2008. In trader shorthand, the exchange is now the NASDAQ OMX and serves as the trading hub for nearly 3,000 different equity and currency option contracts. Among these are options on the Australian dollar, British pound, Canadian dollar, Japanese yen, Swiss franc, New Zealand dollar, and the euro, a cross-border currency used in several European nations.
When you're trading currency options, you're trading a legal and enforceable contract to buy or sell a fixed amount of foreign currency. For example, the Australian contract -- symbol XDA -- represents 10,000 Australian dollars; the price of the contract is the amount of U.S. dollars needed to buy this amount of the Aussie currency. You can buy the contract if you believe the Australian currency and the contract will rise in value against the dollar; or "short" -- sell -- the contract if you believe the Australian currency will fall against the dollar.
Options aren't forever -- in fact, they last only a few months. Every contract carries an expiration month; the contract expires on the third Friday of the month. At any time before expiration, you can close the trade by either buying or selling it and complete a "round trip." If the contract rises in value, you make a profit. If you're underwater on the contract, and the trade is still open on expiration, your broker will close the trade on the expiration date at a loss.
Premiums and Settlement
The option premium quoted by the exchange moves in point increments that represent $100 each. If the contract is quoted at 5.14, its price is $514. You can buy a single contract or multiple contracts, but as long as the contract is open, you run the risk of a loss if the currency moves against you. Options deliver no interest or dividends and carry no guarantee from your broker or any federal agency. If you trade currency options, to avoid a big loss, use stop-loss orders that will close your trade at a preset level.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.