Futures Trading Vs Options Trading

June 16, 2022 3 min read

Futures Trading Vs Options Trading

Futures Trading Vs Options Trading

The concept of Stocks is a wide one. Apart from investing or trading, there are other things you need to learn about stocks – for instance, the derivatives. Ideally, there are two stock derivatives – Futures and Options. They are similar yet different in some ways, especially when trading them. They protect investors against the stock market’s fluctuations in the future. However, it is important to set the differences between Future Trading and Option Trading to know what exactly you are dealing with regarding stocks. 

Future Trading

Future Trading is the buying or selling of an asset, i.e., individual stocks, commodities, or exchange-traded funds at a future date. This trade is performed in a futures market, and it involves two parties agreeing to do business on a particular date. The parties, in this case, could be investors, companies, or speculators (or producers). 

The whole essence of future trading is to secure the price of a commodity against future fluctuations. And the unique thing about this stock derivative is that it is uniform so that buyers and sellers follow the same rules. 

Option Trading

Option Trading gives buyers and sellers the right (not an obligation) to purchase or sell an underlying asset at a pre-agreed price on a specific future date. Options are divided into two types – Call Option and Put Option. 

For the Call Option, the buyer is given the privilege to purchase an underlying security at a particular price. For the Put Option, the seller is given a chance to sell a security at a particular price. Whatever the case may be, trading stocks is not mandatory if the prices are not favorable. 

The Differences

While the trading of the two stock derivatives looks similar, some differences between them automatically influence a buyer or seller. Their major differences are: 

Trading Power

With the word Trading Power, it could either mean Rights or Obligations. When trading, there are things you are obliged to do for your own favor. Futures Trading is one of those things so that you can trade stocks at a specific price and a specified date. On the other hand, Options Trading is about rights – you can choose to exercise them or not. 

Trade Dates

Future Trading and Option Trading both happen against the future, but they can also vary in trade dates. Futures are traded on the particular date specified or agreed upon. On the other hand, Options are flexible, i.e., you can always trade any time on or before the agreed date. 

Payment Time

Ideally, there is always a cost for trading options or futures; however, the time for payment could be different. For instance, futures do not accept upfront payments. It only allows you to pay when the contract has been traded off on the agreed date. But there must be leverage (or margin in %) agreed on should you change your mind about the trade. This margin can influence you to make profits or losses. 

On the other hand, Options require advance payments called a premium. That leaves a seller with the opportunity to earn if the trade fails to hold. As a buyer, you lose this premium payment. 

Risk

Finally, when trading, there are always risks involved. However, the risk is different with these twin stock derivatives. For instance, when stocks price drops, you have a window shot at opting out of an options trade. Unfortunately, it is never the same for futures – the trade must hold when it is supposed to, regardless of the current market price. In summary, options are low risk, while futures are a mid-to-high risk. 

How to Know Which Trading to Choose?

Judging how futures trading and options trading are similar yet different, you can be confused about which to choose. However, with these pointers from speculators and hedgers, you should know what to do. 

  • Hedgers look at price stability before trading either the stock derivatives. They are focused on securing securities at a fixed price with the potential of remaining that way for a while. 
  • On the other hand, Speculators look at the long-term odds. They are focused on low-price securities short-term but with greater long-term returns. 

Conclusion

As a stock trader, deciding what to go for out of the two stock derivatives, i.e., futures or options trading, is consequential. You need to understand the concept of either of them to know what move to take on your next purchase or sale. As long as you can figure this out, your trading experience shouldn’t be difficult.  


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