I would like to trade options on the FX market, say EURUSD and GBPUSD. I have seen that there are options on the CME that have FX futures as underlying and also some options on spot on the Philadelphia exchange. But bid ask spreads are pretty wide in both cases. Is there any better alternative market if I want to trade FX options with enough liquidity and hence tighter spreads?
Here is a link that shows currency option activity during regular market hours:
An option has an expensive premium to pay but limits the amount of loss that is possible.
I would instead take futures currency positions or over-the-counter forex positions and just have a stop-loss order. The weekend downside closed-market possibility could be avoided.
For instance, close the position at the end of each trading week and re-open it at the begin of each trading week. During the trading week the stop-loss order is no protection for only about one hour per-day on the forex market or only about 45 minutes per-day on the futures market. Actually some of the forex market does stay open from 5 PM to 6 PM but it is not very liquid.
Now a stop-loss order is not good protection when and if the market goes historically ill-liquid. The market can drastically move past the stop-loss before executing the order.