Forex - Limited Risk Options
Limited Risk Options let you trade on the short-term direction of a market, with a limited level of risk, known when placing the trade.
Limit your exposure without closing your position
Available on FX pairs, Limited Risk Options cap your potential loss with a floor or a ceiling - while your potential profit is not capped - and they keep positions open if prices move through those caps.
Options trades are typically categorised as puts or calls.
- Buying a call option provides the right to buy an asset at a set price.
- Floors on Upside Limited Risk Options work in a similar manner. If the asset price falls below the floor, you are protected against any further loss.
- Buying a put option provides the right to sell an asset at a set price.
- Ceilings on Downside Limited Risk Options work in a similar manner. If the asset price rises above the ceiling, you are protected against any further loss.
With Limited Risk Options, you are still able to close your trade before expiry. Unlike trades with Stops and Limits attached, Limited Risk Option positions remain open when they trade through the predetermined floor or ceiling levels.
Pricing Movement Example - Upside Limited Risk Option
Limited Risk Option products run for 23 hours, from midnight until 23:00. The following graph illustrates an example of the price movement of an Upside Limited Risk Option (with a floor) compared to the underlying spot FX price, throughout the day.
While the underlying spot FX price may fall below the floor, the contract's price will not. This guarantees that your risk is limited, and known to you when you open the trade, while your profit is not capped by any ceiling.
Pricing Movement Example - Downside Limited Risk Option
With Downside Limited Risk Option trades, the contract's price will not rise above the ceiling, even if the underlying spot FX price does. The graph below offers an example of the price movement of a Downside Limited Risk Option (with a ceiling) compared to the underlying spot FX price, from midnight until expiry at 23:00.
Just as with Upside trades, with Downside Limited Risk Option trades, your potential profit is not capped, while your potential losses are limited (by a ceiling).
CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial investment, so please ensure that you fully understand the risks involved.