Options Vs Futures: Should You Be Trading Futures?


stock options versus futures

Options contracts give traders the opportunity to trade but not the obligation. In essence, investors have the right to buy or sell options shares at certain prices at any period if the contract is in effect. On the contrary, futures trading requires a seller to sell shares and buyers to buy them on a specific date unless the holder closes his position before it expires. Therefore the transaction is solid and must go through since with futures you are often dealing with physical commodities (corn, gold, oil). There is no backing out when it comes to futures, the transaction must go through at the expiration date.

While both futures and options are financial products to make money, their markets are widely different and pose considerable risks. This article considers the differences between these two financial products to help you make a better-informed trading decision as an individual investor.

What Is Futures Trading

Futures are contracts that require buyers or sellers to buy or sell an asset at a future price and date. Investors must transact the underlying asset at the predetermined price, regardless of the contract’s market price at the expiration date. These underlying assets may include physical commodities and other financial instruments.

Futures contracts are time-oriented. That is, they expire, which forces you to take certain decisions, such as selling the contract to take your profits or losses, staying out of the market, or taking the delivery of the equity, product, or commodity the contract represents.

When Can You Trade Futures? 

Most futures contracts can be traded from Sundays, 6 PM (EST) to Fridays, between 4:30 PM and 5 PM (EST) – depending on the commodity. Technically, trading stops for thirty to sixty minutes daily. So essentially futures are traded 24 hours, which can really add to the stress and workload of individual investors. Where your sleep may be severely hindered.

What Are the Risks of Futures?

Simply put, futures contracts can lead you to huge debts. While other traditional financial products, such as bonds and stocks, are associated with high-end risks, futures undoubtedly generates high yields but even higher possibilities of extremely severe losses.

In essence, futures exposes investors to maximum risk, just possible to potentially lose all your money within the twinkle of your eye. You have to put some money down when buying a futures contract, and your rewards and costs aren’t established until such a contract expires. It is until then both involving parties discover their outcomes. What does this infer? You have “almost zero” control over your risk profile.

Futures prices are accounted for daily, meaning a certain amount of money is transferred between the seller and buyer at the end of the day. If the prices are unexpectedly volatile, you may be required to add additional funds at the end of each trading day, so you don't get margin called.

To compound this issue, Futures, are traded with large sums of money, as mentioned its mostly used to trade commodities. So, you either will have to have a massive account or be heavily leveraged. 

Lastly, the Futures market is traded on relatively thin volume, as not many people can afford to trade it. As a result, its heavily prone to manipulation by hedge funds and other trading entities. You will often see a huge crash or weird price action, wondering what just happened, only to find out a month later it was manipulation by a firm under investigation. This really makes it difficult for the individual investor to be successful.

These three issues listed above make trading futures extremely dangerous for retail investors. If you don’t have just enough assets to cover your losses, you can end up losing both your trading portfolio and personal finances.

What is Options Trading?

Options, like futures, is also a risky enterprise. The options contract is based on the value of underlying assets, like stocks. As mentioned earlier, an options contract offers the opportunity to buy and sell assets at a certain price but not the obligation. In essence, you don’t have to buy or sell an asset if you don’t want to.

As a derivative investment form, even when you buy or sell shares, it doesn’t represent the actual ownership of the underlying investment until you finalize the agreement.

 
Is Options Trading Risky?

The technicalities associated with option trading risks is that it is relative. This means, not all options contracts have the same risk. As a buyer – otherwise called holder – you have a different risk than if you are the seller – otherwise called the writer.

You can continue reading more about options contracts and the associated risks.

The Bottom Line – Futures or Options?

Undoubtedly, trading options are risky. However, futures are riskier than you can imagine, with several futures traders failing to record profits consistently, particularly because of their vulnerability to price manipulations.

Futures contracts include extreme liability to both the seller and buyer. That is, movement in the prices of the underlying stock may warrant either party (whether buyer or seller) to deposit more money into their account to fulfill their daily trading obligation.

With one wrong move when trading futures contract, your account may be wiped and maybe even plummet you into enormous debts for your entire life. Technically, it’s not worth the risk. 

Ideally, you should stay away from both!

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