Options Trading Tutorial

Is this how European style currency options work? Please help me understand/know more. Thanks.?

I know about American style options which like European options give the buyer the right, but not the obligation to buy or sell an underlying security, e.g. stocks, commodities or currencies on or before the options expiration date at an agreed price, the strike price for American style options. European style can be exercised at expiry. I also know that American style options give the buyer (holder) or seller (writer) the right to hold 100x their initial capital, for example, if a stock is priced at £100/share to actually own 100x that stock would cost £10,000 in cash wheras as an equivalent position in options would only cost £100 because of 100x leverage + commissions of course. Now, I know that European style options on the other hand give you the right to hold a contract of 1000 of the underlying securities. What I would like to know is this; I know that trading currencies with American style options would give you for example "Cable" - GBP/USD, 100x leverage on your currency options position which at current would give you exposure to $15,984 at an exchange rate of $1.5984/£1 with £100 + commissions hence 100x leverage. Would European style options give you 1000x leverage on your money as a European options contract consists of 1000 of the underlying sucurity, for example, "Cable" - GBP/USD at $1.5984/£1; would this mean that with the same £100 that the American style currency options would give you which is 100x your money or $15,984, would this mean with the same £100 you could control 1000x your money, or $159,840 - £100,000 with European style currency options? Please help me understand them as I am not too sure about European style options. Thanks P.S. Sorry its so long.

Public Comments

1. You're right about the difference between European and American style options in your first paragraph. But everything after are not true in general about stock options, and not at all true about currency options. Remember European and American are just two labels, European options are not ANY MORE European than American options. The things you wrote about leverage are not correct. For stock options, depending on the price of an option, the leverage can be very different. Each option contract (listed in the US) has a MULTIPLE of 100, NOT a LEVERAGE of 100x, meaning one contract allows you to sell or buy 100 shares of the underlying stock, that's all. Therefore, for the same stock, a more expensive option would have LESS leverage. Now, for currencies, it's a very different story. In the US, all currency options from the CME are OPTIONS ON FUTURES and are all AMERICAN, with a multiple of ONE. That is, each contract allows you to buy or sell one futures contract of the underlying currency at the strike price. For the EUR/USD pair, each futures contract represents 125,000 Euros. If you trade currency options in other countries, then obviously the contract specifications are different. The here's the link to the EUR/USD futures and futures options page of the CME group. You can find more details about these contracts there. http://www.cmegroup.com/trading/fx/g10/euro-fx_contractSpecs_options.html