Both the options market and currency markets provide serious potential for significant gains – but which one is right for you?
Firstly, let’s define the fundamental differences between the two markets and then we’ll discuss the pros and cons of each. When trading options, you invest in the contracts that can move stocks, ETFs, or index products. When trading in Forex, you’re seeking to profit from fluctuating currency rates. Currency trades are always made in pairs, with a trader comparing the value differentials between two base currencies, like the US Dollar and the Euro for instance. Both markets offer the potential for serious profits, but which one is best suited to your investment goals and appetite for risk? Read on to discover some of the key characteristics of each investment opportunity.
Access to the Market: The Forex market is famously accessible, and with 24 hours per day, 5 days per week access, there is virtually always time for a trade. The weekend markets are also technically open, although weekend trading is something that most Forex traders forego. The options market is tied to the stock market, so trading is essentially limited to normal trading hours (9am to 4:30pm). This can enable a trader to “mentally switch off,” but it also prohibits savvy investors from reacting quickly to market announcements or news events that can present an investment opportunity.
Quick trades: Everything about Forex is quick. When conducting Forex trades, everything happens almost immediately. Trades are executed straight away, with none of the delays that have become commonplace among options trades, or within many other markets too. This often means that you’ll get your order confirmed at the price you want, without having to deal with any of the price slippage that is common among options trades. When it comes to the speed of trading, Forex has a distinct edge.
Leverage: This is a key concept that can make a big difference in terms of profit potential. However, leverage must be approached in a responsible manner in order to minimise over-exposure and significant losses. With currency trading, leverage levels can range from 50 to 400 times the initial investment, while options-related leverage ratios are often smaller. This means that Forex investors have the ability to make significantly greater profits in a short amount of time, all with less upfront investment. However, the leveraged investment must be carefully watched in order to minimise disastrous results. The lesson here: start small and gradually increase leveraged positions.
Commissions: Keep in mind that each time you initiate an options trade you’ll generally pay a broker a commission. Forex trading, on the other hand, operates within a marketplace that is essentially a group of traders and computers who create a web that bypasses marketplace norms. This means that you’ll bypass commissions when trading through Forex, but the Forex trading firm will make money on the trade by adding a spread between the bid and the ask price. This is where they’ll make their profit. The nice part is that the Forex model doesn’t result in fees or commissions like options trading, even if you do end up paying slightly higher than the base currency rate.
Risk management: Which investment option delivers the edge when it comes to risk management? This really depends on the type of trader you are, and how you decide to play the game. Forex traders must enact position limits, which means that the online trading software will automatically create a margin call when the margin amount exceeds the value of the trading account in dollars. This is an automated safeguard that ensures that the trader keeps losses in check. In addition, keep in mind that with Forex you can determine the amount of time between trades, whilst options only provide a specific time period in which to trade before the options expire.
Options trading can present some definite benefits for today’s active trader. The marketplace is highly regulated, meaning that a defined system and concrete marketplace help to quell any uncertainty about the person on the other end of a trade. Profits can also be made in most market conditions – up, down, and sideways. A centralised price also helps to keep things consistent. However, options can only be traded from Monday to Friday, during “standard” work hours – 9:30am – 4:00pm EST. This means that the savvy investor sits around and watches his or her investment do nothing.
Forex trading, on the other hand, enables a trader to start an account and begin making financial moves with very little upfront money. Easy diversification is also possible when traders utilise micro or mini lots of currency, and keep leverage ratios within reason. Markets are open 24 hours a day during the working week, and trades are even possible on weekends – though most trading groups don’t support this, and the ones that do often charge large premiums for the service. Keep in mind, however, that Forex isn’t as regulated as a traditional stock exchange (many traders see this as an advantage), and your broker takes the other side of your trade when dealing with currency exchanges.
When deciding which option is best for you, keep in mind that the ability to conduct trades 24 hours a day might be viewed as a benefit to many, but it can also lead to problems. Those who have a difficult time separating emotions from good trading logic might find themselves over-trading due to the easily accessible market. Many investors like to make a trade and then walk away, not having to worry about the position of their investment during all hours of the day. On the other hand, the vast majority understand that Forex trading is a global activity, and that what might be happening across the world at 2 o’clock in the morning could present as an important trading indicator at home. In the end, there is no one right answer. However, Forex trading has proven to be lucrative, exciting, and risk averse for those who want to make serious profits in a short amount of time. The choice, as always, is yours.