The definition of an FX option is identical to that of any option. Namely, it gives the buyer the right to either buy with a call option or sell with a put option, an underlying currency at a defined strike price and on a defined expiry date. However, the differences start to become apparent when you consider what does the right to buy or sell an underlying currency actually mean? In foreign exchange, there are always two currencies and you buy one and sell the other. We also need to consider in which of these two currencies the premium is paid. It will become clear that the real difference between FX options and say stock options is that rather than having an obvious asset and its price, you have two cash amounts in different currencies. This has the potential to cause some confusion as we'll soon see. The first confusion comes oddly enough in determining whether an FX option is a put or a call. Let's look at an example. Here we have all the usual option terms declared expiry date, strike price, underlying, notional amount. But what you'll notice is that we've declared this to be both a euro call and a US dollar put, and in fact, it is both because the right to buy euros must also be the right to simultaneously sell dollars. This is the essence of a foreign exchange trade after all. This option gives us the right to buy euros at a price of $1.10 per euro or an exchange rate of 1.10. If we exercise our right as the owner of the option, we will be buying 10 million euros and selling 11 million dollars.

Given this characteristic that an FX option is both a call and a put on the different currencies, it then follows that there are many different ways you could describe an FX option. In fact, the following descriptions of our option example are all correct euro call dollar put, or a euro call, or dollar put, or euro dollar call. On top of that, we could quote the size of the option as either the 10 million euro amount or the 11 million dollar amount. So a 1.10 euro call in 10 million euros is the same as a 1.10 dollar put in 11 million dollars. Or we could even say we have a 0.9091 put in 11 million dollars with the 0.9091 strike price referring to an inverted rate. This last example, while not incorrect, is not to be encouraged. It is clear that we could do with some market conventions so that mistakes don't get made. And here are those conventions, the essence of which are always to describe an option in terms of what is happening to the base currency. By this we mean the notional should be quoted in the base currency, and to use our previous example, that is euros.

The strike should be quoted in standard wholesale format, so not dollar euro, but rather euro dollar. And the type of option should be clear as to whether this is a call or a put on the base currency.

Note that the call or put terminology can also be used to describe the quoted currency. So it is not wrong to say euro call dollar put. Indeed, you could argue that it is more complete, but also saying euro call will do the job too and is maybe slightly more efficient. It's also completely correct and indeed common to say euro dollar call. This means the same as euro call. The reason here is that a trader thinks about an exchange rate, not necessarily as the exchange of two different currencies, but as a price that can go up or down. So a call on euro dollar is an option which will pay off if the exchange rate moves higher. This is no different to a spot FX Trader saying that they have bought euro dollar when what they've literally done is buy euros and sell dollars. One final point on market conventions. These conventions exist in the wholesale market where one professional options trader deals with another. In the client market where banks are quoting prices to clients, it is common for the client to use the language they find easiest to understand, which may not match the wholesale conventions, in which case a translation needs to be made between the client's language and that of the market.