Options or Forex Trading?
Last updated on April 22nd, 2015
Two of the popular markets available to traders in the financial world are stock options and currency trading using the forex markets. The topic often comes up which one is better? They are both very different animals and a trader needs to be aware of those differences to make sure they are trading the market that best fits their trading style and profit goals.
First, let’s define each market. When trading options you are trading contracts that can control both the upside and downside movement in a stock, ETF, or Index product. Using a call option will give you control of the upside movement in a stock, while a put option will give you control of the downside movement in a stock. These are products that give the retail trader the ability to control 100 shares of stock for a fraction of the cost when compared to buying the shares of stock outright.
When trading the forex markets, a trader is looking to profit from changing currency exchange rates. Currency markets trade in pairs. A trader is betting on changing exchange rates between the two currencies that make up that pair. For example, when trading the EUR/USD the trader is making bets on the changing exchange rate between the Euro and the U.S. Dollar. Forex trading is also a great way for the retail trader to get involved in the markets with a smaller account size due to the leverage that these products offer.
Pros & Cons of Options Trading
While these are both potentially very profitable markets for traders to look at, they both have their pros and cons. Let’s walk through some of those pros and cons of the options markets first. Options are great because they are highly regulated products that trade on centralized exchanges. When entering into a position with options, you have the peace of mind knowing that these contracts are backed by an exchange which means you won’t have to worry about the person on the other side of the trade not living up to their side of the deal. You also know that the price that you are looking at when entering into a trade on your broker platform is the same price that is quoted on a different platform. This is important to point out as you will see the difference when we get to the forex markets. Options are also the only financial product that give you the opportunity to make money in up, down, and sideways moving conditions. All other products require the markets to be moving up or down to make money.
On the downside, options are only traded from 9:30-4:00 New York time. For traders in different parts of the world this can be a problem depending on the time change. For a trader in Australia, trading the U.S. session can be a problem considering the time change. Options also have time decay which means they are wasting assets. The longer you hold them the less value they have, meaning you not only need to be right on direction but you also need the stock to move fast enough.
Pros & Cons of Forex Trading
When looking at the Forex markets, there are also pros and cons. Let’s look at the benefits first. Forex markets allow a trader to get started with as little as a few hundred dollars, which is great for the small retail trader. This can also allow a trader to easily diversify their portfolio by being able to look at more markets. These markets are open 24 hours a day which is a great feature for traders all around the world. Given how active the world markets are these days, having access to the markets 24 hours a day can be a huge advantage. This access can allow a trader to react to news quicker than most other markets. Forex markets also offer different contract sizes. Traders can trade full, mini and micro mini size lots. This gives the forex trader the ability to manage risk easier than other markets.
On the downside, forex markets can also be tricky because they aren’t very regulated. There is no centralized exchange where these products trade like many other markets. This means a trader’s success or failure could depend on the prices being quoted to them by their broker. In many cases the forex broker is taking the other side of your trades causing a conflict of interest. This feature alone can scare many traders away from the forex markets. Forex markets being open 24 hours a day can be viewed as a benefit, but can also be viewed as a problem. Knowing that these markets are open 24 hours a day can lead to over trading.
Options vs. Forex: The Final Verdict?
So which one is a better product for trading, options or forex? The answer to this question often times comes down to personal preference. In my own trading, I prefer the regulated markets in the options space. Like many other traders, I don’t want my broker to take the other side of my trades. I want to be fighting a fair fight. The 24 hours access that the forex markets offer is a problem for me. I like the ability to place my options trades during the U.S. stock market hours and then not have to worry about them again until the next morning. Being able to shut down after the market closes is a big factor in me choosing the options market. As you can see my choice in picking the options market really comes down to personal preference. Does this mean one is better than the other? There is not a universal answer to that question. A trader needs to evaluate their personal goals, taking into account their risk tolerance and daily schedule to determine which markets are best for their needs.
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