Forex online option trading can easily be done these days thanks to the internet. The trick is to find the right forex options broker that best suits the style of trading you wish to participate in. There are a few different alternatives for trading foreign currency options and all of them can be done online.
1. Vanilla Forex Options
The term "vanilla options" is just another name for regular options (as opposed to "exotic options"), much the same as you would expect to find trading stock options. The underlying is a nominated quantity of the currency pair, for example, $100,000 spot value of the GBPUSD currency cross.
In this example, if you believe that by option expiration date, the British Pound will increase in value against the US Dollar, you could either buy GBPUSD call options or sell GBPUSD put options. Since the amount of the underlying covered by the options is so large and the price for the options surprisingly low, a small move will produce profit that corresponds to having purchased $100,000 worth of GBP itself.
Forex online option trading allows you to execute vanilla options trades immediately from any computer connected to the internet. Using a reputable broker such as SaxoBank will ensure access to this market. Saxobank are based in Germany but take accounts from all over the world. They are one of the few brokers who offer vanilla forex options.
Most vanilla type forex options are traded "over the counter" by banks and not through exchanges, so they are not available to the general public. Saxobank however, are market makers. They don't charge commissions but make their money from the spread, so the brokerage fees will generally be in proportion to the size of your trade. Highly recommended if you want to keep it simple.
2. Forex Binary Options
Binary options are are more exotic form of forex online option trading. Unlike vanilla options, they have an "all or nothing" characteristic attached to them. The idea is that you either win or lose - only two outcomes, hence the name "binary". These are normally short term trades and can be done over a number of underlying assets such as stocks, commodities and indexes, but most popular with foreign currency pairs.
3. Currency Futures Options
You can also trade futures on foreign currencies. There are futures contracts for all sorts of things, including commodities, stock indexes, treasury bonds, precious metals and so forth. But here's the things - these futures also have options on them. In fact, futures are the only way the average person can trade the commodities markets.
Futures and their options are traded on the Chicago Board of Options Exchange (CBOE) in the USA and to trade them you need to find a broker that provides access to this exchange.
One good strategy for trading foreign currency options is to use a non-directional approach - meaning, that you're not trying to anticipate which way the currency pair is about to move. Using a combination of vanilla options and forex spot trading, you can set up a virtually risk free position.
You start with an at-the-money short straddle. You will receive a double credit for this, being premiums from the "at the money" calls and puts you have just sold.
Once the trade goes through, set up a pending stop limit order to buy the same currency pair at the leveraged spot price at a chosen price above the short straddle strike prices and sell the spot price below the straddle strike prices. Your chosen limit prices for each of the spot positions should be calculated after allowing for commissions and the amount of credit received from selling the straddle.
If the price action sails away in either direction, thereby breaching one of your preset spot price order levels, the superior leverage on the spot price will outperform the loss on the sold options. If it goes nowhere, you get to walk away with a credit from selling the options.
You need to keep your spot price entry points close, because the only way this type of trade can fail, is if the price action triggers a spot price buy, then retreats back to breach the spot price entry point on the other side of the straddle. Even then, the credit received from the straddle will mitigate any loss considerably.
You can implement the above strategy quite easily with SaxoBank. You can trade both types of financial instruments with them.
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