Stock Futures vs. Stock Options

5 stars based on 51 reviews

Options and futures are both commonly used trading tools in the world of investment and finance. Trading either of them is a little more complicated than simply buying stocks which is a form of investment that many people have at least a basic understanding of. Used correctly, they both offer plenty of opportunities for making money. Options and futures are both widely used to benefit from leverage and they are also trading options versus futures useful tools for hedging purposes.

However options and futures are actually very different from each other. This can be a very costly mistake, and no one should ever get involved with any kind of financial trading or investment without knowing exactly what they are doing. On this page we highlight the similarities between options and futures, look at the main difference between the two, and explain why we believe options trading offers many advantages.

It should be made clear trading options versus futures there are certain similarities between options and futures, and it is understandable how even relatively experienced investors can get the two confused. They are both financial contracts that exist between two parties — the buyer and seller of an underlying asset. They can both be traded on public exchanges, although some of the more complex contracts are only sold over the counter.

They are also both leveraged derivatives — although if you know what this means the chances are that you can already recognize the difference between the two. Basically, a trading options versus futures is a financial instrument that derives its value primarily from one or more underlying asset.

Leverage is a term for any technique that you use to effectively multiply the power of your capital. For example, if you trading options versus futures stocks in a company then you physically own a share in that company and the asset you own can go up or down in value. When buying a derivative, you are buying a contract which is valued according to the underlying asset on which it's based and possibly other factors such as the length of the contract.

Leverage is when you effectively multiply the power of the cash you are investing to generate larger returns; this is possible with both options and futures and is the main reason why they are known as leverage derivatives. The fundamental difference between options and futures is in the obligations of the parties involved. The holder of an options contract has the right to buy the underlying asset at a fixed price, but not the obligation. The writer, or seller, of trading options versus futures contract is obligated to sell the holder the underlying security or buy itif the holder does choose to exercise their option.

This obviously puts the holder of a contract at an advantage, because if the underlying security moves against them, they can simply let the contract expire and not incur any losses over and above the original cost. If the underlying security moves in the right direction for the holder and therefore against the writerthen the writer must honor their obligation. In a futures contract, both parties are obliged to fulfill the terms of the contract at the point of trading options versus futures.

This is a very significant difference. Buying a futures contract where you will be obliged to buy a particular security at a fixed price carries much more risk than buying an options contract where you have the right to buy a particular security at a fixed price, but are not obliged to go through with it if that security fails to move up in value as you expect. Both parties involved in a futures contract are effectively exposed to unlimited liability. The costs involved are trading options versus futures different.

When an options contract is first written, the writer of it sells it to the buyer and receives the money that the buyer pays. Depending on the terms of the contract, the underlying security involved, and the circumstances of the writer, the writer may have to have a certain amount of margin on hand.

They may also be required to top up that margin trading options versus futures the underlying security moves against them.

However, the buyer trading options versus futures those contracts outright and no further funds will be required from them. With futures, though, as trading options versus futures parties are exposed to losses depending on which way the price of the underlying security moves, they are both required to have a certain amount of margin on hand.

Price differences on futures are settled daily, and either party could be subject to a margin call if the value of the underlying security has moved against them.

This contributes largely to why futures trading is generally considered riskier than options trading. Below we look at a couple of the advantages trading options has to offer.

As mentioned above, when trading futures you are potentially exposed to big losses whichever side of the contract you are on. If you have the obligation to buy trading options versus futures underlying security at a fixed price and the security moves significantly above that fixed price, then you could lose substantial sums.

Trading options versus futures, if you have the obligation to sell an underlying security at a fixed price and the security moves significantly below that fixed price then you could experience sizable losses. If you are writing options contracts and taking on an obligation to either buy or sell an underlying security at a fixed price, then you are exposed to similar risks.

However, you can trade options purely by buying contracts and not writing them. This means that trading options versus futures can limit your potential losses on each and every trade you make to the amount of money you invest in buying specific contracts. Whenever you buy options contracts, the worst case scenario is that they expire worthless and you lose your initial investment.

Even if you do want to write contracts in addition to buying them, you can easily create spreads to trading options versus futures that your losses are always limited. The potential for limited liabilities in options trading is a major advantage, particularly for those that are against trading options versus futures risk investments. Another big advantage options trading offers is versatility.

There are a number of strategies that you can use to create spreads that enable you to profit from multi-directional price movements. For example, you could create a spread that would result in profit if the underlying security went down in value a little bit, or if it stayed stable, or if it went up in value by any amount.

This would only result in limited losses if the underlying security went down a significant amount. With futures contracts, you can typically only make money from the underlying security moving in the right direction for you. There could be unlimited losses if your investment moves in the wrong direction or if a neutral result occurs. Section Contents Quick Links. Advantages of Options Over Futures As mentioned above, when trading futures you are potentially exposed to big losses whichever side of the contract you are on.

Read Review Visit Broker.

Option expiration dates 2014

  • Binary options signals europe review francois

    Mercado de opciones financieras en mexico

  • Advisory service for options trading

    Bank 54 binary options indicator program how to beat brokers!

Robot forex fap turbo gratis

  • Options investopedia pdf

    91 in binary trading strategy for beginners

  • Forex trading indonesia online dubai

    Estrategias opciones binarias pdf free download

  • Trading options in malaysia water

    Dhcp discover-options broker review

Spot currency option trading in india

24 comments Calgary ring road sw options trading hours

Best binary options system 2018 dodge chargers

Some strategies which can be implemented with options or futures cannot be implemented with CFDs. An option is the right to buy or sell a set number of shares usually on or before a set date. Do not underestimate that subtle point of being able to trade with as little as one contract.

This is fantastic for those starting out or if you are testing a new trading system. CFDs provide a wide choice of instruments to trade.

With some CFD Brokers , it is possible to trade more 10, trading instruments, covering all the global markets. In Australia, options are limited to a select number of shares, and you need to watch out for liquidity.

Trading options in Australia used to require contract sizes of 1, shares. In , trading one options contract now controls 1, BHP shares for example. Liquidity, in this case, means the number of buyers and sellers present at any one time. The more buyers and sellers, the easier it is to transact at your preferred price. When there are fewer buyers and sellers, it means you have an illiquid market. Illiquid markets are difficult to buy and sell at your preferred price.

CFDs provide the ability to trade both long and short with ease. For Short Selling , you open the position by selling it first. To close it, you buy it back.

There are no complicated rules to follow or different instruments to choose. CFDs are simple to understand and trade. CFDs are derivatives, which are sophisticated trading products and you must know the risks involved before you start trading. Option pricing is quite complex and not for the faint-hearted. It is critical for CFD traders to manage their risk to ensure their survival.

It is impossible to say whether CFDs are the right instrument for you to trade. Only you can decide that. For more information, head over to the ASX website.

They have an excellent Understanding Options guide. Consider the risks of both options and CFDs, consider the flexibility of each product and then decide the right instrument for your circumstances. You have a considerably larger pool of instruments to select from including stocks, indices, commodities and currency pairs. CFDs allow you to hedge your stock investments in a less complicated way than options.

If you hedge your stock portfolio using CFDs, it is possible to get paid every day you are short. Learn more about CFD trading examples.