Futures and options are some of the most popular trading alternatives people have. But most people are confused between the two and it is difficult for them to settle the score in futures vs options debate. But the best way to find the right investment is by finding out the differences between the two. Even though futures vs options might seem to be interchangeable, they are not and they come with their own advantages and disadvantages. So, without further ado, let us figure out what they are.
Difference Between Futures and Options
Both futures and options are a form of derivative contracts. This implies that futures and options are financial instruments where they have underlying assets. While it is true that in both these trading instruments, there is selling and buying at a predetermined date in the future, it is here the difference arises. In options, it is not compulsory to buy or sell at the pre-given date. As an individual who has gone for options, you will have the authority to by no means be obliged to buy and sell at a particular date.
But this is not the case with futures. Once you have agreed to buy or sell at a fixed date, you will be obliged to follow the necessary course of action on that date. This is the stark difference that puts both the instruments in futures vs options struggle.
How to Choose Between the Two?
Even though the financial instrument you are going for is a personal choice, by taking a look at their advantages and disadvantages, you might be able to figure out the real winner in futures vs options for yourself.
Futures is a more cost-effective market instrument compared to options. This is because in the futures, you do not have to pay any advance payment on the contract. But when you opt for options, you have to pay a premium fee to the sellers for issuing a contract.
Go for options if you do not want to face any risk with the contract. Since in options you do not have any obligations to buy or sell at the stipulated time. So, if the market is not going accordingly, you can resist doing the trade. In future, you do not get assurance. Once the contract is made, no matter how the underlying asset is performing, you will have to trade when the day arrives even if it is for a loss.
Futures as a market instrument are older than options, hence its market size is bigger. So, in futures, you can trade with larger units of the underlying assets. But the same cannot be said about options. Options are generally preferred by those who want to trade in smaller units.
When it comes to profit margins both futures and options have no limits. It could be anything. But a better assurance is provided by options. This is because in options you are not obliged to trade at a loss. So, you can always be on the side of profit when it comes to options.
Even though both futures and options are liquid, due to the large market size of futures, they provide higher liquidity. So, if bigger trades are on your priority list, it is better to rely on futures in comparison to options for high liquidity.
Both futures and options have their merits and demerits. It all boils down to the choice and which options bring more feasibility. It is always better to look into details about the underlying asset before you can make a decision about which alternative in futures vs options you want to go for.