Trading in shares, also known as stock or equity, is one of the most popular investment choices.
While people like to invest in shares, sometimes they may face a financial crunch that may prevent them from making the right investment decisions at the right time. However, there are certain financial instruments, where one can buy these shares without paying money upfront. That is an aspect of share trading known as futures and options trading. Let’s find out more about these concepts.
As the name suggests, futures are a form of contract where the buyer agrees to buy an asset, like shares, at a predetermined date in the future trade from the date of contract at a predetermined price. The contract between buyer and seller is executed on the date determined by both the parties. A futures contract imposes an obligation to buy on the decided terms.
Options are also a form of contract where the investor has the right to buy or sell an asset but not the obligation to do so at a predetermined price by a certain date. The ‘put’ option gives the investor the right sell the shares while the ‘call’ option gives the right to buy shares. The right to have this option is purchased by the buyer after paying a ‘premium’.
What is the difference between futures and options?
The difference between futures and options is mainly that the buyer has the option to go through the contract in the case of ‘options trading’ whereas the same buyer is obligated to go through the contract in the case of ‘futures trading’.
Let’s further distinguish between futures vs options trading:
|Futures have higher liquidity and hence make for a better day-trading option.
|Options move less quickly than futures and are not as liquid.
|They tend to be a great option to hedge risk against other securities.
|Options could help hedgerisk but in the long-term.
|Since futures have an obligation to buy or sell, they are seen to carry more risk than options.
|Options are considered less risky since there is an option and not an obligation to buy or sell.
Which is more profitable, futures or options?
Futures have the edge in terms of being both liquid and stable in the market while options givean investor a chance to understand the risk and choice to walk away or take the plunge. Hence, both are good choices. While some might say that future trading can be considered as more profitable than options, there are also certain aspects which need to be kept in mind such as risk appetite of the investor, experience, and market conditions.
In case of futures vs options, one should not forget that both are financial instruments and are subjected to market risk. Hence, one should read about it in more detail tobetter understand which avenue aligns with their financial goals and investment strategy before making a decision.