Spot Fx vs Options

Forex market trading is a common factor between spot fx (cash or futures) and currency options (future options) . Both involve the trading of currency pairs.

Spot fx trading price is determined at the point of trade while in case of fx options price is determined for a future date by a contract. Like spot fx, the contract, however, can be settled any time before the expiry of the contract.

For both instruments, forecasting or price change is involved. Since two currency pairs are involved - one is called quote or contract currency, other is base currency, profit can be made whether there is an upside or downside, depending on which currency pairs you have bet on.

Spot fx is a contract between trader and market-maker while options is an agreement between a trader and a regulated exchange.

A spot FX broker can set up the operations with a small amount of investment as an Introducing Broker, so-called white label operator or even as an independent broker. Spot Fx is conducted over the counter (OTC) - also called a dark pool - liquidity being provided by market-makers. It is a decentralized market. Cash spot is not traded on any exchange and the OTC brokers can open an account with even $100 deposit.

Fx futures or futures options are traded on regulated exchanges like Chicago Mercantile Exchange (CME) and have fixed minimum value contracts. Minimum investment required is US$1,500 to US$10,000 deposit, depending on the choice of a broker.

Interest fee

Retail spot fx brokers charge interest (swap fee) on credit facilities by accepting margin deposit as a performance bond or cash collateral. On Currency Futures the exchange collects interest in advance so you don't have to pay any overnight interest. The difference between cash spot and futures prices reflects it.

Why spot fx is popular

During the last 15 years and so, free availability of online trading platform, Metatrader 3 in 2002, followed by Metatrader4 in 2005, has spawned a huge extra-ordinary industry consisting of Introducing Brokers, educators, signal providers, programmers of chart indicators and automated trading bots, and trade media publishers in such a short time that has no similar parallel in recent history of enterprise.

Leverage of 500 to 1 is possible in the cash FX market. In a majority of cases, the leverage can be devastating when things go wrong. Underfunded Cash FX traders put in as little as $100 to trade contracts worth $50,000 will find themselves losing money should the underlying currency manage just a 0.20% move against them in a couple of seconds.