Currency options allow investors to purchase option contracts on the value of foreign currency as it compares to the U.S. dollar. These contracts are U.S. dollar-settled, meaning no delivery or receipt of foreign currency occurs, and contracts are written in terms of U.S. dollars per unit of foreign currency (Philadelphia Stock Exchange, PHLX) or units of foreign currency per U.S. dollar (International Securities Exchange, ISE). Currency options are European style options and are cash-settled.
If you're trading call options on the PHLX, for example, your contract would be in-the-money if the foreign currency strengthened vs. the U.S. dollar over the life of your contract. Conversely, if you're trading put options, your contract would be in-the-money if the foreign currency weakened vs. the U.S. dollar during the life of your contract. The opposite would be true for currency options traded on the ISE because the contracts are quoted in the reverse format.
Currency Option Example - PHLX
For example, let's say the value of the Currency X at the time of your contract is 1 Euro = 1.3500 U.S. dollars. Currency bid and ask prices are quoted as 100 times the conversion rate, so the price you would see if you got a quote for Currency X is $135. If you think Currency X is going to grow even stronger against the U.S. dollar, you could buy a call contract on Currency X on the PHLX on the $140 strike.
At expiration, Currency X is at $145, so your option contract is in-the-money. Currency option contracts are cash-settled, so your profit would be the settlement price minus the strike price, all multiplied by the common options contract multiplier of 100. Your net gain would be ($145 - $140) x 100 = $500. To determine your actual profit from the transaction, subtract the premium you paid to purchase the contract.
Contract: Call Currency X
Strike Price: $140
Price at Expiration: $145
Net Gain: $500
Profit: $500 - contract premium
Again, remember that currency option contracts on the ISE are quoted in terms of units of foreign currency per U.S. dollar, so the strategy in this situation would be reversed. If you thought Currency X would strengthen against the U.S. dollar, you would purchase a put contract on Currency X on the ISE.
Currency Option Quotes & Symbols
Options on a select number of foreign currency exchange rates are available through the Philadelphia Stock Exchange (PHLX) and International Securities Exchange (ISE) option exchanges.Settlement values are based on the 12:00 Noon (Eastern Time) spot price on the last trading day prior to expiration.The underlying symbols for each currency can be found in the tables below.While these underlying symbols themselves do not trade, they can be used to load an option chain to determine the available strike prices.
Note: A few ISE-traded currencies are quoted in U.S. dollars per unit of foreign currency.
Options involve risk and are not suitable for all investors. Detailed information on our policies and the risks associated with options can be found in the Scottrade Options Application and Agreement, Brokerage Account Agreement, and by downloading the Characteristics and Risks of Standardized Options and Supplements (PDF) from The Options Clearing Corporation, or by requesting a copy from your local branch office. Market volatility, volume, and system availability may impact account access and trade execution. Supporting documentation for any claims will be supplied upon request.