Difference between Futures & Options Trading Online | Espresso

Difference Between Futures and Options Trading

If you are into stock trading, you understand that the equity and equity derivatives market. The equity derivatives market is much bigger than the equity market. Derivatives are financial contracts that derive value from the underlying assets, such as stocks, currencies, commodities, indices, exchange rates, etc.

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Over the past few years, derivatives have become popular because they offer lower risk, high leverage and high liquidity, making them an efficient way to trade in the market.

Depending on the type of contract, derivatives can typically be of two types – futures and options. Futures trading and options trading allows an investor to buy a security at a particular price by a specific date. However, the market and risk involved in both differ significantly.

Read on to know the differences between futures and options trading:

What is Futures Trading?

In futures trading, you are obligated to buy or sell an asset in the future at a pre-determined date and price. In futures trading, the contracts have delivery or expiration dates – when the contract must be closed. Upon expiration date, the right to buy or sell lapses.

You can choose a future call to obtain the right to buy at a strike price or opt for a future put option to get the right to sell at a strike price. Futures trading contracts are highly liquid and are suitable for day trading purposes.

What is Options Trading?

Options trading means you have the right or an opportunity, not the obligation, to buy or sell an asset at a specific price and date in the future. If you do not want to buy or sell, your loss is limited to the premium you paid to obtain the options contract through your trading account.

In options trading, there is an expiration date. It indicates the day by when your right to buy or sell the asset remains effective. Similarly, to a futures trading contract, a call option is to buy the asset at the strike price, and an option put is to sell the asset at the strike price.

Futures vs options trading

Check this table below to understand the difference between futures and options trading:

Basis of Difference

Futures Trading

Options Trading

Obligation

In futures trading, you are obligated to buy or sell an asset at a certain time and price in the future.

In options trading, you have the right but not an obligation to buy or sell an asset at a certain time and price in the future. However, if you decide to buy or sell, the other party have to oblige the contract.

Risk

There is a higher risk in futures trading because you have to fulfil the contract even if the security is not moving in a favourable direction. There is a risk of unlimited loss or profit.

There is a lower risk in options trading because you do not have to fulfil the contract if the security is not moving in a favourable direction. Loss, in this case, is only limited to the premium incurred in buying the options contract.

Advance payment

When engaging in futures in a trading account, you do not have to pay any upfront cost. However, you have to pay the contract price eventually.

When engaging in options in a trading account, you have to pay an upfront premium. If you decide to forgo the contract, you stand to only lose the premium.

Expiry date and relevance

In futures trading, you have to fulfil the contract on the pre-agreed date.

In options trading, you can fulfil the contract anytime before the expiration date.

Trading margin

In futures trading, you require a higher margin than options trading.

In options trading, you require a lower margin than futures trading.

Type of investors

Futures trading is more favourable for speculators and arbitrageurs.

Options trading is more favourable for hedgers.

Liquidity

Prices fluctuate drastically, creating more liquidity

Prices fluctuate less, creating less liquidity

Value

Maintains the contract value over time

Loses value quickly with time

Summing Up

To engage effectively in futures or options trading, you should understand the functioning of both derivatives clearly. You can buy or sell assets through a future or options contract by opening a trading account. Your trading account online gives you a choice to invest in the market assets, indices and stocks, using the futures in a trading account or options in a trading account.
Also Read: How to Trade in Futures and Options?

Futures trading and options trading is not available for all securities. Furthermore, they are available in lots. Hence, you cannot choose a single stock for futures in a trading account or options in a trading account. The lot size is determined by the stock exchange.

If you find futures trading and options trading complicated yet potentially profitable, you can open a trading account with a professional brokerage firm and get investing assistance.
Also Read: Everything You Need to Know About F&O Stocks

 

Frequently Asked Questions

Yes, options trading contracts lose value over time, unlike futures trading contracts.

Yes, the margin requirement in futures trading is more than options trading, but the final amount depends on the security lot size and your contract terms.

Risk in derivatives depends on your investment goal and strategy. However, generally, futures trading is considered riskier but rewarding than options trading.