It depends on your requirement, if the values are changing always then lookup, if the values are fixed or changes very very rare then Lookup.
If lookup no need for metadata change or customization for any new add or delete & all the referred records will be cleared when deleted.
If option set then metadata need to be changed for add or delete && if deleted, then exisiting references will not be deleted since the value for the optionset is stored in the entity table row.
This will be an issue if a scenario like below
U added Blue : 1, Black:2, Greed:3. and created few records and decided to remove Greed:3.
After few weeks when you want to add Brown and you added Brown:3. then all the records which was green earlier will show as brown.
All this is the pros and cons and the final call should be yours based on requirement
If my response answered your question, please "mark the response as an answer" and also "vote as helpful". Regards, Hari. www.crm2011byhari.blogspot.com
