Introduction
At the end of the day, the aim of any financial market is for the trader to extract money from it. Of course, investors realised many years ago there are several ways to do this, hence why various financial instruments exist.
Although each is structured differently, the end goal is to figure out whether one is more profitable and worthwhile than the other. This guide will look at Forex vs options. Should you go with Forex or options?
If you’ve been on the net for any length of time, you will undoubtedly have seen an ad promoting either. And this is understandable, considering that they are some of the most popular financial markets.
Here, we will look at each instrument individually, compare them in detail and offer the benefits and drawbacks of siding with Forex or options.
Forex vs options: what is Forex?
Let’s explore the first section of our Forex vs options discussion. Foreign exchange of an over-the-counter or decentralized market for trading currencies. Here, we mean numerous distributed financial dealers instead of a centralized exchange.
These institutions typically include large banks and designated ‘market makers’ called brokers. The aim of FX is for different countries to swap currencies for business, government, and travel purposes.
This activity spans central banks, financial institutions, commercial companies, and bureau de changes. Needless to say, there is also a massive industry sector consisting of retail traders or speculators who trade purely for profit.
A key reason is that FX is the most leveraged market, a massive advantage in the Forex vs options conversation. FX also produces the highest trading volume of any instrument globally, a lot other higher than options.
This means it is much easier and quicker to sell and buy large quantities without any issues. There are several ways of speculating with currencies, one of them being Forex trading options.
As with other financial markets, FX is a derivative. This means that we trade the values of the underlying currencies instead of owning them physically.
Forex vs options: what are options?
Now that we’ve looked at the first half of our Forex vs options comparison let’s look at the second portion. An option is a financial derivative that allows you the right but not the commitment to buy or sell a market at a particular ‘strike’ price and expiry date.
The latter, which can range from a minute to a few months (depending on the broker/exchange), is a time limit the asset has to travel.
The obligation part is one of the biggest differences when looking at Forex vs options trading. What do we mean here? When you buy or sell an FX pair, you technically have ownership of it for some period (although it’s not the possession of real currencies).
You are therefore obliged to settle it at an eventual time for a loss or profit, which is not precisely defined. With options, it’s more like a wager that the price will be above or below a certain level in a defined period.
You are not obligated to hold outright whatever you’re trading from the start. However, if your prediction is wrong, you pay a defined premium. If your forecast is correct, you profit up to where you decide to close the position or let it expire.
The most basic and popular options are called vanilla options, for which we have calls and puts. A call option is when you participate in a buying deal.
With a call, you bet an asset’s price will be above the strike price before it expires. A put option is a bet that the value of a market will be below the strike price before it lapses.
Here is a simple example.
Suppose you had a call option for ABC stock, currently trading at $100. You predict that after an hour, the price will be at least $120 (strike price). Let’s assume that your premium is $10.
If the stock rose to $150 by expiry, you would be ‘in the money’ and profit off the $50 difference (once you exclude the $10 premium, the total is $40).
Conversely, if it went below the strike price, you would be ‘out of the money’ and only be liable for $10, regardless of how far the market moves unfavorably before the expiry.
Of course, you can trade options on most financial markets, like stocks, commodities, metals, and currencies. Forex options trading is an avenue for traders looking to implement options in FX. It works like we have described, except that you are buying and selling currency pairs.
People trade options for various reasons, but hedging is a prominent one. It is common for an investor to trade actual stocks and take the opposite position with an option. Yet, with the increased accessibility, many people trade options for speculative reasons as they do in FX.
Forex trading vs options trading: the main differences
Let’s now explore the primary distinctions between Forex vs options. This will help us pinpoint the similarities and where each of these differs.
Time horizon
One of the most remarkable differences when looking at trading options vs Forex is the length of time people hold their positions. In currencies, there are no expiry dates. So you can maintain a trade infinitely, provided you have enough margin.
Options function slightly differently, depending on where you trade them (more on this in a bit). The expiry time can vary from one minute to a year. Brokers tend to be on the low end of this scale, while exchanges are on the opposite side.
Between trading options vs Forex, options are better suited for short-term speculators. While we do have short-term traders like scalpers, you don’t need to worry about your positions being automatically closed.
The point is that FX is more flexible and better for medium or long-term investors like swing traders. With options, you always need to be wary about the expiration dates, which will vary across providers. Conversely, no such need exists on FX, regardless of the broker you use.
Risk
Firstly, we are dealing with naturally leveraged products when observing Forex vs options. But for this section, we are looking rather at the structure of losses.
In Forex, we deal with stop losses, an order traders apply beforehand that will automatically close their position at a specified price. Despite the importance of a stop loss, there are two challenges.
Firstly, the slippage issue means you could lose slightly more than anticipated. However, the main problem is that a stop loss isn’t technically fixed, meaning you can lose more than expected.
Several reasons would lead someone to widen the stop loss or remove it entirely. So, the ceiling to what you could lose becomes higher for these reasons. So, from this angle in our Forex vs options analysis, this is a massive disadvantage in FX.
However, the premium paid in options means you have a known loss amount regardless of market conditions or personal behavior. This is one reason why many people like options. The premium is all you’ll potentially lose, no matter what.
With Forex, you must monitor your account carefully and ensure that you don’t remove the stop loss or trade in situations where slippage could happen.
Trading environment
The next portion of our Forex vs options comparison is the environment. Options trading historically began on exchanges, the largest being the Chicago Board Options Exchange (CBOE).
Needless to say, there are now plenty of options brokers. However, the gist is that FX is exclusively traded through brokers, while you can trade options through a broker and an exchange.
While both share a few similarities, they are quite distinct.
An exchange creates a marketplace for buyers and sellers, where you can see the number of trades, volume, open interest, etc.
When you are dealing with a broker, they are effectively the marketplace because you deal directly with them. They derive their pricing from other dealers or may create their own to match the market values the general public sees.
The brokerage model is not transparent for this reason. On the other hand, exchange pricing is the real market because you can view orders (thanks to the order book) from actual traders.
Yet, brokers still offer far more advantages as we’re looking at options trading vs Forex. The most significant benefit is accessibility. With conventional exchanges, the barrier to entry is a little higher when it comes to starting balances.
Also, some exchanges require you to assert your expertise and other financial information. Brokers are much friendlier to investors with lower trading capital, especially in Forex.
The other distinction is that brokers provide far higher leverage than exchanges. Again, with FX brokers, this is exactly the case. Although using too much leverage is destructive, the benefit is that you need a much lower account balance.
If you are more experienced, have a higher net worth, and find a benefit with an order book, then exchanges are for you. For most people, brokers are suitable.
Between option trading vs Forex, FX brokerages are easier to find and offer greater flexibility than their counterparts.
Leverage
Leverage is one of the main factors affecting the extent of profitability relative to your account. We know that this tool is a double-edged sword because it can amplify gains and losses equally.
But when used with skill, it can greatly benefit your profits. In an argument looking at Forex vs options, it’s clear that trading currencies can make you more money.
Even with option Forex trading, it generally doesn’t go above 1:500. In pure FX, it’s not uncommon to find leverage starting from 1:500, 1:000, or higher.
Regulation
Whether you are dealing with equities, stock, Forex or options, supervision is paramount. Ultimately, it’s people’s money being traded each day. Therefore, to ensure no malpractice takes place, strong governance is needed.
An exchange has the highest regulation, which is an advantage of trading through this avenue. While watchdog monitoring is also excellent with brokers, the industry has a massively unregulated side.
This is due to the decentralized nature of currencies, which is further amplified through brokers. Not all options brokers are regulated either, meaning you should know the safe providers to use.
With an exchange, everything is concentrated in a central place, making it easier to regulate and monitor. The gist is that the regulation with brokers is not as stringent as with exchanges. Still, as mentioned previously, exchanges are not as accessible for the average person.
Trading costs
For this section of Forex vs options comparison, FX is the clear winner because of having a simplified cost structure. When trading currencies, you typically incur a spread or commission or trade depending on your positional volume.
If you’re trading in normal conditions, the spread doesn’t vary much, meaning that you expect consistency. Options work a little differently. The premium changes not according to the volume but based on the market price, intrinsic value, and contract length.
As you can see, a few elements could make a premium pricier than simply incurring a spread or commission. Therefore, in most cases, trading Forex is cheaper.
Complexity
Many wonder which is more difficult to learn in Forex or options. In general, the level of complexity for any financial market, whether it is crypto, stocks, or gold, is relatively the same.
Although the actual traded thing differs, technical and fundamental analysis laws remain consistent. When you study these elements, you’ll realise they are not easy to master in any instrument.
Yet, from a natural trading perspective, between spot forex vs options, the former is much easier. The vanilla options described earlier only scratch the surface. You get more option types like binary, call/put spread, call/put ratio, straddle, condo, seagull, risk reversal, and butterfly, among others. As you can see, it may be a little complicated for others to grasp.
The other point worth mentioning is that you need to get the direction AND time correctly as an option trader. Yet, in Forex, you only need to predict the direction.
Overall, spot FX is simpler to understand; it is straightforward buying and selling. The essence is to buy or sell, where you only have two outcomes without worrying about expiry time.
So, for a beginner, Forex is less complex than options when we look at this viewpoint. However, getting to a mastery level for each market can take years.
Market size
FX is the largest financial market in trading volume globally. The Bank for International Settlements conducted its triennial survey looking at this statistic.
They found FX averaged a daily turnover of $7.5 trillion, higher than the 2019 figure. The chart below shows the growth since 1989.
It’s worth noting that spot FX, the Forex most people trade, accounts for about $2.1 trillion. On the other hand, the Forex options trading sector is roughly $304 billion in daily volume.
What about the size of the options market? At the time of writing, our research into five options exchanges (CBOE, NASDAQ, NYSE, MIAX, Box Options) found a daily volume of approximately $15.2 billion.
Even if this entire options market were worth 50 times higher, it would pale in comparison to the FX volume. The enormous trading activity in currencies is another contributor to why it’s more profitable than options.
High volume is also an indicator of high liquidity. This means that trading is more stable since you can easily get in and out. It’s essentially a numbers game. When participating in Forex, you know there are far more traders buying and selling than in other markets.
Forex vs options: pros and cons
Let’s summarise all the previous pointers with brief benefits/drawbacks in deciding between Forex or options.
Pros and cons of Forex
| Pros | Cons |
| Much larger market than options | Less transparent as it’s traded through brokers |
| Offers the highest leverage | Too much leverage can lead to substantial losses |
| Simpler to understand than options | Doesn’t have a fixed loss premium structure like options |
| Best for long-term holds | |
| Has lower trading costs |
Pros and cons of options
| Pros | Cons |
| Limited and fixed downside risk | Slightly more complex due to the number of options types |
| More transparent (if traded through an exchange) | Less leverage |
| More regulated (if traded through an exchange) | Lower trading volume than FX |
| Best for short-term hedging/trading | Has higher trading costs than FX |
Conclusion
Ultimately, FX remains the most beginner-friendly market. Options are better suited for someone with trading experience already due to the different option types and the premium structure.
If you decide to go down the Forex route, why not look into an automated trading system like Galileo FX? It is rated 4.7 stars on Trustpilot and works in tens of markets ranging from currencies to commodities across MT4/MT5 brokers.
