Advantages of Options Over Futures
The derivatives market is larger than the commodities market. Options trading and Futures trading play a key role in it.
What are derivatives?
Derivatives are financial contracts that derive value from the underlying assets such as stocks, commodities, bonds, currencies, and market indices. These determine the profit and loss made on these contracts.
Understanding Options and Futures
In a Futures contract, there is an obligation to buy or sell assets at a predetermined price and time. Options, however, give the buyer the right but not the obligation to trade . They carry great potential for making substantial profits. These contracts also offer significant leverage on the future value of their underlying assets.
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While both can be profit-making, options bring with them certain advantages that could make them more attractive to an investor. Here are the benefits of options trading:
As an investor in Options, you have the alternative to walk away from your contract at any point in time. In Options, buyers are not under any obligation to execute the contract. However, in Futures, both buyers and sellers are obliged to do so.
Options offer you considerable leverage. These derivatives bring with them the benefit of huge savings in costs. Which means, if you were to buy an Option against your portfolio, you can minimise your losses if the shares you owned decreased in value. As you enter an options contract on lower margins, you can earn greater returns.
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The risk in the case of Options is limited to the premium you pay for the contract. The cost of an Option is a very small percentage of that of the underlying asset. If your Option expires, you will lose only the cost of your contract. Which means, you are aware of the amount of your potential loss at the time of entering the contract. However, Futures contracts are valued by that of the underlying asset. Which means, it is not possible for you to know for sure how much you could gain or lose. Losses in Futures contracts can exceed your original investment.
There are many strategies available in the Options market. You can hedge positions and combine your trades to create a strategic position and make significant returns. This is usually done by taking advantage of factors like market volatility and timing.
There are two types of Options, depending on whether you are buying or selling. These are:
Call Option: These are contracts that give investors the right to buy the underlying asset at a specific price.
Put Option: These are contracts wherein investors have the option to sell stocks at a specific price before the expiration of the contract.
While Options and Futures share certain similarities, there are significant advantages of Options over Futures when it comes to aspects like risks and rewards.
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