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What Is a Spot Rate and How It Is Used in Trading?What Is a Spot Rate and How It Is Used in Trading? Spot rates are a cornerstone of trading, reflecting the real-time price for immediate settlement of assets like currencies and commodities. They provide traders with crucial insights into market conditions and influence strategies across various domains. This article explores what spot rates are, how they work, and their role in trading. Spot Rate Definition The spot rate is the current price at which an asset, such as a currency, commodity, or security, can be bought or sold for immediate delivery. In essence, it’s what the market says something is worth right now, reflecting real-time supply and demand. Unlike future prices, which are influenced by expectations and contracts for later delivery, this type of pricing is all about the present. Spot rates are especially crucial in highly liquid assets like forex and commodities, where prices can change rapidly based on global events. To use an example, if the rate for the euro against the dollar is 1.1050, that’s the price at which traders can exchange euros for dollars at that moment. It’s dynamic, adjusting instantly to factors like economic news, interest rate changes, and geopolitical developments. Spot pricing also serves as a benchmark in derivative contracts, such as futures, influencing how traders and businesses hedge against potential price movements. For instance, a gold producer might monitor these quotes closely to decide when to lock in prices. Spot Rate vs Forward Rate: What's the Difference The spot and forward rates (or spot rate vs contract rate) are both used to price assets, but they serve different purposes. While the spot rate is the current price for immediate settlement, the forward rate is the agreed-upon price in a transaction set to occur at a future date. The former reflects conditions right now—shaped by immediate supply and demand. Forward rates, on the other hand, factor in expectations about future conditions, such as borrowing cost changes or potential economic shifts. For example, if a company expects to receive payments in a foreign currency within a certain period, it can use a forward rate to guarantee the amount it will receive and avoid adverse exchange rate fluctuations. One key link between the two is that forward rates are derived from spot pricing, adjusted by factors like interest rate differentials between two currencies or the cost of carrying a commodity. In forex trading, if borrowing costs in the US are higher than in the eurozone, the forward rate for EUR/USD may price in a weaker euro relative to the dollar. Specifically, a forward rate is determined by three factors: its underlying spot rate, interest rate differential, and the contract’s time to expiry. Backwardation and Contango Backwardation and contango are terms used to describe the pricing structure of futures markets, specifically the relationship between spot prices and futures contract prices. These concepts help traders understand broader expectations and supply-demand dynamics. In backwardation, the spot price of an asset is higher than its future prices. This often happens when demand for immediate delivery outweighs supply. In the oil market, backwardation might occur if there’s a short-term supply disruption, causing the current price to spike while future prices remain lower, reflecting expectations of supply returning to normal. On the other hand, contango occurs when future prices are higher than spot quotes. This can indicate that holding costs, such as storage fees or insurance, are factored into the future price. For instance, in gold, contango might be typical since storing gold involves costs, which are priced into future contracts. These structures aren’t just theoretical—they directly affect trading strategies. CFD traders can use these concepts to anticipate market movements and hedge against adverse price changes. By understanding market sentiment and expectations, traders can speculate on the direction of prices. How Spot Rates Are Determined Spot prices are dynamic and reflect the immediate balance of supply and demand. They fluctuate based on several key factors that shape trading activity and market conditions. - Supply and Demand Dynamics: When demand for an asset outpaces its supply, the rate rises, and vice versa. For example, a spike in demand for oil due to geopolitical tensions can push its price higher. - Economic Indicators: Inflation data, GDP growth, and employment figures heavily influence spot quotes, particularly in forex. A strong economic report can lead to currency appreciation, while weak data may have the opposite effect. - Interest Rate Differentials: In forex, differing interest rates between countries impact currency spot rates. Higher borrowing costs in one country can attract investment, driving up demand for its currency and its price. - Liquidity: Highly liquid assets, like major currency pairs, might have more consistent prices. Less liquid assets can see greater price volatility due to fewer participants. - Geopolitical Events: Elections, wars, and natural disasters can cause sudden price shifts by disrupting supply chains or altering economic outlooks. Types of Spot Markets Spot markets are where assets are traded for immediate settlement, offering real-time pricing and instant transactions. - Forex: The largest spot market, where currencies like the euro or dollar are exchanged at the current rate, often used by traders to capitalise on short-term price movements. - Commodities: Includes trading raw materials like gold, oil, or wheat. Buyers and sellers agree on the spot price for immediate delivery, reflecting current supply-demand dynamics. - Equities: Shares of publicly traded companies are bought and sold at the prevailing market price on exchanges like the London Stock Exchange or NYSE. - Cryptocurrencies*: Although not mentioned earlier, these involve buying and selling digital assets like Bitcoin at current prices and receiving an instant ownership transfer. What Spot Rates Mean for Traders and Markets Spot rates are effectively snapshots of reality, reflecting the current balance of supply and demand. For traders, they provide a critical context for decision-making and deeper insights. Market Sentiment and Timing Opportunities These rates offer a real-time lens into market sentiment. Sudden price movements often signal shifts in supply, demand, or broader economic conditions. For instance, a rapid rise in the spot price of oil might indicate geopolitical tensions affecting supply chains, which could have knock-on effects across energy-related sectors. Traders monitoring these shifts can identify potential opportunities to capitalise on short-term volatility or avoid unnecessary exposure. In addition, spot rates reveal liquidity levels. Highly liquid markets, such as major forex pairs like EUR/USD, typically have tighter spreads and more consistent prices. By contrast, less liquid assets might exhibit greater price discrepancies, signalling caution or potential opportunities to analyse deeper. Impact on Strategy and Broader Markets Spot rates directly influence trading strategies, especially in markets tied to commodities or currencies. Futures pricing, for instance, is often built upon the spot quote. Traders use these quotes to gauge whether hedging or speculative strategies align with current dynamics. A mismatch between spot and futures prices can indicate a contango or backwardation scenario, providing insight into whether traders are expecting costs or supply changes in the near term. Beyond individual strategies, they also ripple through broader markets. For businesses and investors, they act as barometers in cost evaluating and pricing. For example, airlines keep a close eye on the current price of jet fuel to decide when to secure future contracts, directly impacting operational costs and profitability. Similarly, multinational companies use spot pricing in forex to manage cross-border expenses or revenue. The Bottom Line Spot rates are at the heart of trading, offering real-time insights into market conditions and influencing strategies across financial markets. Understanding how they work can help traders navigate potential opportunities and risks. Whether you trade forex, commodities, stocks or other markets, choosing the right broker is essential. Open an FXOpen account to access competitive trading conditions, 700+ markets, and user-friendly platforms and trade CFDs designed for all levels of traders. FAQ What Is a Spot Rate? A spot rate represents the price at which an asset, such as a currency, commodity, or security, is currently available for immediate settlement. Traders and businesses often use these prices as benchmarks in transactions and to assess market conditions. What Does Spot Price Mean? The spot rate meaning refers to the exact market price for an asset at a specific moment in time. It’s the price buyers are willing to pay and sellers are willing to accept for immediate delivery. These prices are dynamic, changing with broader conditions. When to Use Spot Rate? Spot rates are commonly used when immediate delivery of an asset is required. Traders often rely on them in short-term positions, while businesses might use them for immediate currency exchanges or raw material purchases. They’re also used as reference points when evaluating forward contracts and derivatives. How Are Spot Exchange Rates Determined? Spot exchange rates are determined by the forces of supply and demand. Factors like interest rates, economic data, geopolitical events, and liquidity can influence them. Is Spot Trading Risk Free? No, all trading carries risks. Prices can be volatile, and unexpected market events may lead to losses. Understanding these risks and using proper risk management techniques can help potentially mitigate losses. *Important: At FXOpen UK, Cryptocurrency trading via CFDs is only available to our Professional clients. They are not available for trading by Retail clients. To find out more information about how this may affect you, please get in touch with our team. Trade on TradingView with FXOpen. Consider opening an account and access over 700 markets with tight spreads from 0.0 pips and low commissions from $1.50 per lot. This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
Education
by FXOpen
1
Option Strike Price "Secrets" In this article you will learn... - what a strike price is, - the different intervals for strike prices, - how to pick the right strike price, … and much more. Let’s get started. 1.) The basics: What is the strike price? Strike Price Definition: The strike price of an option is the price at which the option buyer has the right to buy or sell an underlying security. As an example, if you are buying a CALL option of AAPL with a strike price of 126, then you have the right to BUY 100 shares of AAPL for $126. And if you are buying a PUT option of AAPL with a strike price of 125, then you have the right to SELL 100 shares of AAPL for $125. Strike Price Intervals When you open an options chain, you will see all the different strike prices that are available. The strike price intervals are set by the options exchange and will change depending on market conditions and the price of the underlying stock. There are four commonly used strike price intervals: $1, $2.50, $5, and $10. There are currently no strict standards and the exchange reviews and decides on the strike price interval of each optionable stock from time to time in order to adjust policies to better cater to trading needs. Here are some general guidelines provided by the Chicago Board Options Exchange (CBOE): - 2.50 points strike price interval is used when the underlying stock is trading between $5 and $25, - 5 points strike price interval is used when the stock is trading between $25 and $200, - and 10 points strike price interval is used when the stock price is over $200. But these are just guidelines. The options exchanges decide on strike price intervals based on market demand and trader’s needs) more than any strict mathematical formula. In the example above, you see that AAPL is trading at about$127. So according to the guidelines, the strike price interval should be $5. But since AAPL is a very volatile stock that currently moves $2.50 per day on average, which is around 2% per day, the $5 strike price intervals wouldn’t make sense. That’s why the exchange decides to only offer $10 intervals to best serve the trader. Strike Price, Option Premium & “Moneyness” When buying or selling an option, you must choose a strike price, and often you will hear terms like: - In-The-Money (ITM), - At-The-Money (ATM), - or Out-Of-The-Money (OTM). I call this the “Moneyness” of an option. In-The-Money Options Strike Prices (ITM) TM Call Options will have strike prices below the current stock price. And ITM Put Options will have strike prices above the current stock price. In the example above, AAPL is trading at around $127 right now. Therefore, the strike prices of 125 and below are considered ITM for Call options. And the strike prices of 128 and above are considered ITM for Put options. At-The-Money Options Strike Price (ATM) An ATM option would be the closest strike price to the current market price of the stock. For our AAPL example (The current price is about $127), the strike prices of 126 and 127 are the closest strikes to the market. So these strikes are considered ATM for both Call and Put options. Out-Of-The-Money Options Strike Prices (OTM) An OTM Call Option’s strike price would be above the current market price of the stock. With an OTM Put Option, the strike price would be below the current market price of the stock. For our AAPL example (The current price is about $127), the strike prices of 128 and above are considered OTM for Call options. And the strike prices of 125 and below are considered OTM for Put options. 2.) How to Pick the Right Strike Price Wow! So many strike prices! So how do you pick the right option strike price? Are some strike prices more desirable than others? Absolutely! It really depends on what you are trying to accomplish: Do you want to BUY an option and make money? Do you want to SELL an option, collect premium and let it expire worthless or Do you want to SELL an option, collect premium, and get assigned? For now, let’s keep it easy. Let’s say you want to make money with a CALL option. Call option strike price example We will use AAPL again as an example. Right now, AAPL is trading at about $127. Let’s say you’re bullish AAPL and expect Apple to move up to 135 within the next month. If you were to look at an options chain, you would have several choices. a.) You can buy a cheap OTM option with a strike price of 135. The last price of the option was $0.86. Since options come in “100 packs”, you would have to pay $86 for the option. This would allow you to buy 100 shares of AAPL at a price of $135. b.) You can buy an ATM option with a strike price of 127. This option is more expensive. The last traded price was $3.80, so you would have to invest $380 for this option. And this option would allow you to buy 100 shares of AAPL at a price of $127. c.) You can buy an ITM option with a strike price of 124. This option is the most expensive. The last traded price was $5.90, so you would have to invest $590 for this option. And this option would allow you to buy 100 shares of AAPL at a price of $124. Now let’s say that AAPL never goes back up to $135. Let’s say that on expiration day (June 11), AAPL is trading at $134: a.) OTM Option with a strike price of 135 This option allows you to buy 100 shares of AAPL at $135. Since AAPL is trading at 134, that wouldn’t make sense. Why would you pay MORE for 100 shares of AAPL than the underlying stock price? So this option is worth nothing, and you lose the $86 option premium that you paid. b.) ATM Option with a strike price of 127 This option allows you to buy 100 shares of AAPL at $127. Since AAPL is trading at 134, you could buy 100 shares at $127 and immediately sell them for $134. In this case, you would make 134–127 = 7 per share. 1 option allows you to buy 100 shares, so your profit is $700. You paid $380 for this option and make $700. That’s a net profit of 700–380 = 320 or 84% based on your initial investment! c.) ITM Option with a strike price of 124 This option allows you to buy 100 shares of AAPL at $124. Since AAPL is trading at 134, you could buy 100 shares at $124 and immediately sell them for $134. In this case, you would make 134–124 = $10 per share. 1 option allows you to buy 100 shares, so your profit is $1,000. But you paid $590 for this option to make $1,000. So the net profit of this trade is 1,000–590 = 410 or 69% based on your initial investment. Let’s review: OTM Option: $86 loss ATM Option: $320 profit = 84% ITM Option: $410 profit = 69% As you can see from this example, it’s super important to pick the right strike price. The underlying security (AAPL) moved from $127 to $134. That’s a 5.5% move. Often traders who are new to options pick the cheapest options contract, i.e. the OTM option. But you would have lost the whole option premium. So should you pick the most expensive one? As you can see in this example, picking the most expensive option (i.e. ITM option) would have yielded the higher DOLLAR amount. But in terms of Return on Investment (ROI), the ITM option was best. Based on the trading strategy that you use, I can give you several guidelines on how to pick the right strike price. In a nutshell, when you are BUYING options, you want to buy an ATM or ITM options contract. And when you are SELLING options, you want to sell OTM options. More about that later. 3.) Three Important Things You Need To Know There are 3 more things you need to know when about strike prices when trading options: What happens when a call option hits the strike price? What would have happened if AAPL would have traded above the strike price of $135 before expiration? Nothing — unless you choose to exercise the option. But if this happens before the expiration date, then it would be better to sell the option since you would make more money. How do I change my strike price once the trade has been placed already? You can’t. You need to choose a strike price when you enter the trade, and you can’t change it while you are in a trade. You can only “roll” the option, and here’s how it works: Let’s say you bought the OTM option with a strike price of $135. And you realize that it was too ambitious and that AAPL probably won’t hit 135 before the expiration date. So you could “roll” the option by selling your 135 call and simultaneously buying the 132 call. What Is Spot Price and Strike Price? The SPOT PRICE is the current price of the underlying security, so using AAPL as an example, Apple’s current spot price, at the time of this writing, is $126.76 which is the price it’s currently trading. The STRIKE PRICE is the price at which you can buy or sell the shares of the underlying security on or before expiration. Summary s you can see, picking the right option strike price is extremely important. It will affect your returns and it could even make or break you in the market. In a nutshell, when you are a BUYER, you want to buy ATM or ITM options since even a small move in the underlying stock price can yield double-digit returns. When you are a SELLER, it’s the opposite: You want to sell OTM options that have a low probability of getting assigned.
NASDAQ:AAPLEducation
by rockwelltrading
2
DE GREY MINING RUN TO CONTINUE?DE GREY MINING (ASX:DEG) has just had a much needed rest. After 8 months and +3000% increase its well deserved after its Pilbara WA "Mallina" Project surpassed 2.2Moz Gold Projection. Sitting 50KM south of one of the most ideal ore exportation capitals in the Southern Hemisphere (Port Hedland WA) it's easy to see why De Greys is going from Strength to Strength, and they haven't even scratched the surface with multiple Gold anomalies yet to be fully explored. Technicals: Area of Interest approaching... Fib Retracement Golden Pocket Near, recently broken .382 level. Uptrend Intact. Has already hit Major Trend Based Fib Retracement target previously for +170%. Healthy retrace almost complete IMO. Ichimoku still intact and Bullish. MACD starting to round anticipating the turn BUT not confirmed. RSI starting to flatten having just crossed the 50. Stochastic indicating oversold region. Approaching MA50 looking for reaction. Some Fundamental Highlights.. Mallina Project quickly turning into Tier 1 Project +2.2 Moz Gold Deposit. Project location among the best in the World. Stable Cash Runway + $28million CASH (30 June 2020) & Debt Free. With such a rapid growth it's hard not to keep an eye on the rising star De Grey Mining, BUT I'm more interested in future projections of Gold consumption and what this means for the Sector. With global demand predicted to rise by 2.1% annually and Australia set to be the No.1 Gold Producer in 2021 it's a good sign for the Domestic players with production set to rise by 9% 2020-2021. These Ideas are NOT 'Financial Advice'!. Scenarios are based off a mixture of TA and Fundamentals current at the time. All IMO GLTA. Happy Hunting!!!
ASX:DEGLong
by Trader_Johnni
2