Premium
The premium is the price that the buyer of an option pays and the seller of an option receives for the rights conveyed by an option. Thus, ultimately the cost of an option is determined by supply and demand. Various factors affect options premiums, including strike price level in relation to the spot price level; time remaining to expiration; and market volatility – all of which will be discussed further.

Exercise
Exercise refers to the process whereby the option buyer asserts his right and goes long the underlying spot currency pair (in the case of exercising a call) or short the underlying spot currency pair (in the case of exercising a put). Only option buyers can exercise options. Sellers of options have the obligation to take the opposite and possibly adverse position to the buyers’ and for this risk they receive the premium.

Exercise Price
Also known as the strike price, the exercise price is the price at which the option buyer may buy or sell the underlying spot position upon expiration. Exercising the option results in a spot position at the designated strike price. For example, by exercising a Euro/USD 1.24 call, the holder of the option would then be long a spot EU/$ position at 1.24.

Expiration Date
This is the day on which an option can be exercised into the underlying spot currency pair. After this point the option will cease to exist: the buyer cannot exercise and the seller has no obligation.

Offset
The buyer is under no obligation to exercise an option. As a matter of fact, many traders choose to offset their position prior to expiration. A trader will offset his position if he wishes to take profits before expiration or limit his losses on the downside. A buyer can offset his option by selling his option before expiration. An option seller can offset his position by buying back or “covering” his short position.

Time remaining to expiration—
An option’s value erodes as its expiration nears. An option with 60 days until expiration will have greater value than an option with 30 days until expiration. Because there is more time for the underlying spot currency pair to move, sellers will demand, and buyers will be willing to pay, a larger premium.

Option Premium Quotations
Option premiums are quoted in a similar manner to spot f/x. Therefore, options are quoted in pips, which is the same as calculating the p & l for an underlying spot position.

Breakeven Points
As mentioned previously, options are versatile instruments that allow the trader to capitalize on a market opinion while limiting risk to a predetermined amount. The maximum amount the option buyer can lose is the premium that he originally paid, plus his brokerage commissions. But before initiating an options position he should first calculate his breakeven point. To calculate an options breakeven point the trader uses the strike price and the premium. Knowing breakeven points will help traders choose more effective strategies.

Time Value Decay
As discussed in the previous section, the value of an option beyond intrinsic value is called time value. It is the sum of money option traders are willing to pay given the likelihood of the option increasing in value. Time value erodes as each day passes, accelerating as expiration nears. This characteristic of options is
referred to as time-decay and is the reason why options are sometimes considered “wasting assets.” If time passes and the underlying futures contract does not move far enough by expiration, the option’s time value will decay and the option trader may incur a loss.

Performance Bond
An option buyer must only put up the amount of the premium, in full, at the time of the trade. However, because option selling involves more risk, an option seller or writer will be required to post performance bond.

In-The-Money
A call option is said to be in-the-money when the spot currency pair price exceeds the option’s strike price. A put is in-the-money when the spot currency pair price is below the option’s strike price.

At-the-money
An option is at-the-money when the spot currency pair price equals the option’s strike price.