Thursday, 2 January 2014

WHY ARE OPTIONS BETTER THAN FUTURES

First of all, both options and futures are derivatives and leverage instruments and are therefore inherently riskier than simply trading stocks itself. Also, both options trading and futures trading can be equally risky if your ability to produce fairly accurate analysis and outlook of their underlying asset is no good. 

Now, comparing options trading and futures trading, I would say that for beginners, Options Trading is less risky than Futures Trading for a number of reasons.
 

Firstly, bigger rewards comes with bigger risks. Futures trading is capable of producing return on investment and leverage far greater than can be attained in options trading
 

Secondly, when you buy
call and put option, your maximum risk is limited only to the amount of money you used when buying those options. The worst that can happen is that your prediction is totally wrong and the options simplyexpire  worthless. You don't lose more money than that. However, in futures trading, you are subjected to unlimited liability and will be expected to "top up" your daily losses by the end of each day in what is known as a margin call. This daily loss continues as long as the stock continues to go in the wrong direction..............

Thirdly, In futures trading, if that initial few days of drop is serious enough, you would be forced by margin call to top up your losses and if you don't have the money to do so, the position is liquidated and you end up owing money to your broker even if the stock does go up after a few days more. However, if you bought call options, you lose nothing even if the stock drops for a few days before rising

Fourthly, There are literally hundreds of options strategies you can use to profit from as many as all 3 directions simultaneously! Such versatility is lacking in futures trading of course. In futures trading, it usually is a single directional bet unless you use some arbitrage strategies which also exist in options trading anyways. 


In conclusion,
 both options and futures are designed to be hedging tools, not speculative tools and futures trading has been extremely valuable in the area of commodities hedging where farmers secure the price of their produce early through buying futures contracts hence hedging against the risk of a drop in price. When used speculatively, futures are capable of producing a fortune overnight but it is also capable of wiping out a fortune and put you in debt overnight. As such, it is definitely riskier than simply buying stock options. 

20 comments:

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