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Forex vs. Options

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Want to jump straight to the answer? The best forex broker for most people is definitely FOREX.com or IG.

There are fundamental difference between the forex (foreign exchange) market and options. Start with our guide to understand your choices and move forward with the best investment today.

Similarities Between Options Trading and Forex Trading

Before moving into how forex and options trading are different, it’s important to note how they are similar. The basic rules of trading — supply and demand and news absorption — apply to both markets. Understanding these rules and how they apply to all markets is essential to investment success.

To keep things simple here, we will assume that we are comparing the options markets within major trading indices (the S&P 500, the Dow Jones Industrial Average or NASDAQ) to forex trading.

Leverage

If you have a leveraged account, you can own more assets in that account than your money would normally buy. Brokers give leverage just like banks give loans. With the proper setup, you can purchase forex currency pairs or options contracts on margin, meaning that you are using leverage. 

Forex brokers offer more leverage on trades. Depending on the broker you choose, you may be able to open an order at 1,000 times your own capital, for example, trading $1,000 worth of currency for every $1 you hold in your forex account.

No reputable options broker will ever have leverage this high but you must consider that options itself is leverage. Every options contract that you purchase, whether call or put, represents 100 shares of the underlying stock. 

Accessibility

Modern brokerages make it incredibly easy to trade the exact financial instrument you want. (We have a list of brokerages that you can use to trade forex and options, and you can read this FOREX.com Review for a good introduction to the most well-known forex broker in the world.) This is in stark contrast to previous generations of investors who were often limited in their choice of instruments. 

You may run across opinions that advise you against forex or options because of the difficulty in accessing one instrument over the other. Check the timing and the veracity of the sources — you may be dealing with out-of-date information that bleeds over into dated investment advice.

Regulation

Both forex and options trading invoke regulations to limit the potential risk investors take on. These regulations may come from different places but they all serve the purpose of protecting traders from taking unmanageable risk.

If you plan on trading forex, you should get used to putting a stop-loss in with your buy orders. Many brokers will not allow you to execute an order without a stop loss. 

By law, trading options on a U.S.-based brokerage requires that you self-assert your level of trading expertise and net worth, among other financial information. Depending on the answers you give, that brokerage will assign you an options level.

Brokerages may not check this information, but it doesn’t help you to lie. Higher options levels expose you to more trading tools but also bigger risk that you may not be prepared to take on.

Differences Between Options Trading and Forex Trading

As you might assume, there are also some major differences between options and forex. Below are 3 of the most important to help you determine which investment tool is right for you.

Asset Type

Forex market investors trade currency pairs, which are assets that you own directly. This is known as spot trading.

When you trade options, you are trading a contract on an asset. Options are known as asset derivatives. As such, you can actually trade options on forex currency pairs.

Options have characteristics that assets do not have and may be used in sophisticated trades that play the buy and sell side at once. Options can also lose money more quickly than assets.

24-Hour Trading

The options market is open only during the normal market hours of Monday to Friday from 9:30 a.m. to 4 p.m. EST. The forex market is open 24 hours per day even for forex beginners. During dead hours, the prices of options “freeze” even though news may be coming in that changes the market. 

At the start of the new trading day, investors may experience a sudden jump in price (up or down) as the market responds to the new information. This phenomenon can cause options to completely jump over automated stops (orders you pre-fill based on certain conditions and entrust an algorithm to execute). Before committing to an options trade, you must be sure that you are prepared for these possible jumps at the start of trading. 

Forex markets can experience jumps over the weekend, as the majority of forex brokers are closed on Saturday and Sunday. News will continue to flow and may cause price gaps on the following Monday. The 24-hour trading schedule of forex usually keeps huge price gaps from occurring on weekdays, although it can occur.

Volatility/Liquidity

The forex market is the most liquid market in the world. Liquidity means that trading is easy. Forex’s liquidity attracts mainstream investors who are looking for efficient, stable markets. It also makes forex the biggest market in the world. 

The contrast with the options market is stark. Depending on the options you choose, you could be trading against only a few people across the entire world. Liquidity in this case is objectively lower and price becomes more volatile.

Pros and Cons of Options Trading

There are some other advantages and disadvantages to options trading based on the differences between the asset types.

ProsCons
Automatic leverage
Can create non-directional and hedging strategies
Potentially higher ROI than trading underlying assets directly
Less capital required to control more assets
Not all losses tax-deductible
Relatively low liquidity
Higher barriers to entry
Fixed fees for trading

Pros and Cons of Forex Trading

Here are a few additional points you should consider before diving into currency trading with forex.

ProsCons
Less susceptible to volatility shocks
Highest liquidity of any financial market
Investors protected against fraud and theft of funds through KYC standards
Default risk limiters
No middleman fees
Less volatility means less short-term growth potential
Susceptible to unexpected political events
Gains easily tracked and taxed
Temptation of extremely high leverage

Best Brokers for Forex Trading

You must do business with reputable forex platforms to take full advantage of the market’s strengths. Consider the following list:

Account Minimum
$100
Pairs Offered
80+
Get started securely through FOREX.com’s website
Commissions
Spreads start as low as $1 But vary based on trading volume
Account Min
$250
1 Minute Review

FOREX.com is a one-stop shop for forex traders. With a massive range of tradable currencies, low account minimums and an impressive trading platform, FOREX.com is an excellent choice for brokers searching for a home base for their currency trading. New traders and seasoned veterans alike will love FOREX.com’s extensive education and research center that provides free, informative forex trading courses at multiple skill levels. While FOREX.com is impressive, remember that it isn’t a standard broker.

Best For
  • MetaTrader 4 users
  • Beginner forex traders
  • Active forex traders
Pros
  • Impressive, easy-to-navigate platform
  • Wide range of education and research tools
  • Access to over 80 currencies to buy and sell
  • Leverage available up to 50:1
Cons
  • Cannot buy and sell other securities (like stocks and bonds)
Best For
Forex Execution
Overall Rating
Get started securely through IG Group’s website
Commissions
$10 value per pip
Account Min
$0
1 Minute Review

IG is a comprehensive forex broker that offers full access to the currency market and support for over 80 currency pairs. The broker only offers forex trading to its U.S.-based customers, the brokerage does it spectacularly well. Novice traders will love IG’s intuitive mobile and desktop platforms, while advanced traders will revel in the platform’s selection of indicators and charting tools. Though IG could work on its customer service and fees, the broker is an asset to new forex traders and those who prefer a more streamlined interface.  

Best For
  • New forex traders who are still learning the ropes
  • Traders who prefer a simple, clean interface
  • Forex traders who trade primarily on a tablet
Pros
  • Easy-to-navigate platform is easy for beginners to master
  • Mobile and tablet platforms offer full functionality of the desktop version
  • Margin rates are easy to understand and affordable
  • Access to over 80 currency pairs
Cons
  • U.S. traders can currently only trade forex
  • Customer service options are lacking
  • No 2-factor authentication on mobile
Account Minimum
$50 USD
Pairs Offered
47
Get started securely through eToro’s website
Commissions
0.09% spread cost
Account Min
$50
1 Minute Review

Though Australian and British traders might know eToro for its easy stock and mobile trading, the broker is now expanding into the United States with cryptocurrency trading. U.S. traders can begin buying and selling both major cryptocurrencies (like Bitcoin and Ethereum) as well as smaller names (like Tron Coin and Stellar Lumens).

eToro offers traders the opportunity to invest their assets into premade portfolios or cryptocurrencies, similar to services offered by robo-advisors through traditional brokers. Though eToro isn’t a one-stop-shop for everything an investor needs, its easy-to-use platform and low spreads is a great way to enter the cryptocurrency market.

Best For
  • International Forex/CFD Traders
  • New cryptocurrency traders looking for an easy-to-use platform
  • Traders who want to buy and sell cryptocurrencies on-the-go
Pros
  • Simple platform that is easy to master
  • CopyTrader feature that allows new traders to copy the same strategies used by professionals
  • Virtual dummy account that gives you $100,000 to practice trades
Cons
  • U.S. traders currently limited to cryptocurrencies
  • Only 15 major coins available to trade

Best Brokers for Options Trading

If you’re trading options seriously, your options broker will definitely influence your chances of success in the market. You may want to test the following brokers to see which best fits you:

Best For
Intermediate Traders and Investors
Overall Rating
Get started securely through Webull’s website
Commissions
$0
Account Min
$0
1 Minute Review

Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.

Webull is widely considered one of the best Robinhood alternatives.

Best For
  • Active traders
  • Intermediate traders
  • Advanced traders
Pros
  • Commission-free trading in over 5,000 different stocks and ETFs
  • No account maintenance fees or software platform fees
  • No charges to open and maintain an account
  • Leverage of 4:1 on margin trades made the same day and leverage of 2:1 on trades held overnight
  • Intuitive trading platform with technical and fundamental analysis tools
Cons
  • Does not support trading in mutual funds, bonds or OTC stocks
Best For
Options Trading
Overall Rating
Get started securely through TD Ameritrade’s website
Commissions
$0 $6.95 for OTC Stocks
Account Min
$0
1 Minute Review

This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.

Best For
  • Novice investors
  • Retirement savers
  • Day traders
Pros
  • World-class trading platforms
  • Detailed research reports and Education Center
  • Assets ranging from stocks and ETFs to derivatives like futures and options
Cons
  • Thinkorswim can be overwhelming to inexperienced traders
  • Derivatives trading more costly than some competitors
  • Expensive margin rates
Best For
Options Education
Overall Rating
Get started securely through Tastyworks’s website
Commissions
$0 flat rate, includes closing costs
Account Min
$0
1 Minute Review

Tastyworks is a sophisticated options and futures broker aimed toward experienced traders. The platform was designed by the founders of thinkorswim with functionality and precision for complicated options trades and strategies. Tastyworks offers stocks and ETFs to trade too, but the main focus is options. 

Options on tastyworks are only charged a 1-way, $1 commission —  far cheaper than almost all competitors. Commissions on futures and micro futures are also affordable, and there’s no minimum required to open a cash account. It’s $2,000 if you want to use margin.

Best For
  • Options traders
  • Futures traders
  • Advanced traders
Pros
  • Powerful platform inspired by thinkorswim
  • Multiple order types and strategies
  • Cheap options commissions
Cons
  • Advanced platform could intimidate new traders
  • No demo or paper trading

Currency or Derivatives?

Forex currency pairs and derivative options are two different asset classes, which naturally produce different strategies for success. When you are deciding the next market to take on, consider your own personality and investment goals before committing to 1 or the other.

If you have more than $30,000 and you are willing to forego some short-term growth for a smoother experience, the forex market may be your play. If you have less money, need built-in leverage and don’t mind a bit of volatility, then options could work for you.

As always, never invest money that you are not willing to lose — both of these markets and asset types carry risk.

Frequently Asked Questions

Q

Do I need to implement a stop-loss?

1
Do I need to implement a stop-loss?
asked
A
1

Yes.  A stop-loss will automatically close out of trading if you reach a predetermined amount of losses. You can also put a stop-limit on a single currency you’re holding to tell your trader to sell if the currency ever reaches below a predetermined price. It’s important not to bid more than you can afford.

answered
Q

How can forex charts help me?

1
How can forex charts help me?
asked
A
1

Forex traders rely on charts in order to make calculated guesses about how a currency value will change by observing historical fluctuation patterns. Most charts have personalized setting options so you can view a variety of technical indicators to analyze price movements.

The 3 most common forex charts are bar chartsline charts and candlestick charts. See Benzinga’s article on Best Forex Charts for more details.

answered
Q

What are the benefits of trading forex options?

1
What are the benefits of trading forex options?
asked
A
1

Several of the advantages include liquidity and 24-hour trading.

answered
Q

Can you make more money trading stock or forex options?

1
Can you make more money trading stock or forex options?
asked
A
1

Forex options give you leverage to increase returns.

answered

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