Anybody can tell me how forex options affect forex market? Do they actually affect the market only when they are exercised? Does an exercise of a forex option occur at the same time as a sell-off of the option? (My understanding is that when an option expires, you have to exercise it then sell it to make profit)

Answer
Typically, what happens is you will be given the difference between the strike price and the current market price, as clearly the Writer of the Option cannot physically deliver a curreny pair at an older, lesser price than the market. So they owe to indemnify you, or place in you in a financial position similar to that as if you have the currency pair at the current market value.

Now as for option contracts, YOU DO NOT need to exercise them if they are about to expire. That would make no sense, as if they are 'out-the-money' you would lose money. A contract can expire, leaving you out the contract's premium. If you are looking for the best forex software, visit this site

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Best Wishes,

How many lots does a Forex option represent?

I know that a stock option is a contract that gives the holder the right to buy (or sell) shares, usually 100, but what about Forex options do they give the holder the right to buy (or sell) 100 lots of a currency?

Answer
Most of the FX options are traded in the OTC market. It's huge and it's filled with big players. In fact, the notional size of the OTC options traded in a year is in the 100's of Trillions of dollars. Unfortunately, you can't participate in this market because it's for institutions.

You can buy options on FX futures contracts. In lots of ways these are cleaner anyway, because there is no settlement risk and no counterparty risk. Also a futures contract quotes the forward price of the currency (almost, if you're a pro you will note that there is a subtle difference). The forward price of the currency is the price you could lock in by converting at the current exchange rate and investing in risk-free bonds denominated in the foreign currency. Basically, currency is expected to depreciate in countries with high interest rates relative to currencies from countries with low interest rates. It makes life easier to not have to worry about forward pricing when you are trading options on FX.

Anyway, an option on an FX futures contract gives you the right to buy or sell one futures contract at the strike price. Thus if you exercise an in-the-money call (put) option on an FX futures contract, you get a long (short) position in a futures contract and some money in your margin account. FX futures contracts have well-defined sizes, for example, a contract on the Euro is $125,000.

You need to know that these markets are filled with people with very deep understandings of the options and FX movements and it is unlikely that you will be able to beat them for money.