FOREX Vs. Options
The financial industry contains many different markets that appeal to traders. While the stock market is perhaps the most widely-known market, others exist that are considerably larger. The foreign currency exchange market, or Forex, is over 10 times the size of all the world's stock markets combined. Traders often approach Forex or the stock options market in an effort to increase the risk-to-reward ratio of their trades, as these are potentially lucrative environments. But key factors differentiate these two markets.
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Similarities
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The Forex and options markets are both highly leveraged environments. This means that the potential percentage returns are exceptionally high for small fluctuations in the products' prices. Unlike stocks, where a 5 percent daily move is considered large, it is not uncommon for Forex or options trades to double in value in a single day. For this reason, aggressive traders engage these markets for potentially high returns.
Product Types
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Despite similarities in risk and reward, the Forex and options markets offer considerably different products. Forex traders speculate on fluctuations in currency exchange rates. Many factors affect currency valuations that are independent of other financial markets, such as the stock market. The options market, however, is tied directly to the stock market. An option contract provides terms for buying or selling real shares of stock. Thus, options are an equity product, in the same family as stocks.
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Expiration
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A key differentiating factor between the Forex and options markets is the life cycle of a trade. In the Forex market, you can buy and hold foreign currency positions indefinitely. But option contracts all have fixed expiration dates. After expiration, a stock option contract ceases to exist and has zero value. You must sell your contract prior to expiration or invoke its terms to transact real shares of stock. This approaching deadline does not exist in Forex trading.
Liquidity
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Liquidity refers to the ease with which you can enter and exit a position. In the Forex market, liquidity is vast and among the highest of all the world's financial markets. This is due to the extraordinary trading volume that occurs in this market, which is over 50 times the size of the New York Stock Exchange. It is virtually guaranteed that you will be able to buy or sell currency at any time you wish with no delays. Stock options, however, can suffer from very low liquidity. On some days, a certain stock option may not trade even once. If you own one of these options, and wish to sell it, you are unable to do so due to poor liquidity. You can easily see the liquidity of a particular option contract by looking at the "volume" column in any option quote chart. For many, this number is exceedingly low considering worldwide exposure.
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