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Forex Vs. Options
Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security. For example, buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or before expiration, while buying a put option provides the right to sell. Upon the option holder's choice to exercise the option, the party who sold, or wrote, the option must fulfill the terms of the contract.
Types of options:
Exchange traded options (also called "listed options") is a class of exchange traded derivatives. Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the credit of the exchange. Since the contracts are standardized, accurate pricing models are often available. Exchange traded options include:
- Stock Options.
- Commodity Options.
- Bond options and other interest rate options.
- Index (equity) Options.
- Options on futures contracts.
Over-the-counter, or OTC options are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution. Option types commonly traded over the counter include:
1) Interest rate options.
2) Currency cross rate options.
3) Options on swaps or swaptions.
Employee stock options are issued by a company to its employees as compensation.
Forex |
Options |
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Largest and most liquid market in the world |
Liquidity depends on underlying asset & expiry date |
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24-hour trading action for 5.5 days a week |
Not 24-hour. Varying trading hours based on the exchanges |
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Easier to calculate stop beforehand |
Difficult and unreliable to place stops on underlying asset |
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Minimum slippage and order errors |
More room for slippage due to lack of liquidity |
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100:1 leverage on standard-sized accounts |
Leverage depends on the type of option transaction you want to engage in. Selling Naked Calls or Puts generally requires a huge amount of margin |
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No commissions |
Commissions on every trade |
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Most liquid market in the world |
Limited liquidy |
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Limited risk, most forex brokers will automatically close your positions when your account balance goes to zero |
It is possible to have a negative balance if you write an option |
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Instant executions, all-electronic market |
Delayed fills possible |