Should i trade options or futures

As the futures market tends to move faster than the options market, a good judgment call can net a futures trader quick and substantial profit. Rather, they put down the initial margin to open the futures position. The initial margin is established by the exchange and is normally a small percentage of the futures contract. From there the balance of the maintenance margin will be adjusted every day in a process called mark-to-market.

If the margin drops below the maintenance level, the trader will receive a margin call and will be required to top up margin funds or reduce or liquidate the position. The remaining payment and commissions are settled at the end of the contract. The cost of options premiums are also generally much smaller than futures initial margins. This in itself can be a major deciding factor for novice traders and a huge deterrence from entering the futures market.

The higher the investment the more risk involved. Options are decaying assets. As the option contract moves closer to expiration, the value of the contract is expected to decline as there are fewer chances or time for the option to turn profitable. To measure how the passage of time affects an options price, we use Theta. You can read more about Theta and the other Option Greeks here. In contrast, Futures contracts are not negatively affected by time decay.

So regardless of whether you enter the trade a day or a year before the delivery date, the passage of time is one less thing you have to consider with a futures contract. This feature alone can make the pricing of futures contracts intuitively easier to understand than options.

Options are typically traded during the regular US stock market session time from am to pm ET. This is the time where there are the most buyers and sellers in the market and options contracts are at their highest liquidity.

While many brokerages now offer after-hours trading, these sessions are not ideal for retail traders. During these outside times, when there is not much participation in the options market, traders will have to deal with more erratic price action, increased slippage, and wider spreads between bid and ask prices.

On the other hand, the futures market is open for business almost 24 hours a day from Sunday evening through to Friday afternoon.

They are also some of the most robust and liquid markets with huge amounts of contracts traded every day. This gives rise to narrow bid and ask spreads while also reassuring traders that they will be able to enter and exit positions quickly and respond to news events around the clock. Let us preface this discussion by stating that we are not tax professionals, this is not tax advice and the reader is of course encouraged to do their own due diligence and consult with a tax professional before trading any instrument.

The tax treatment of Futures can be much more favorable and much less complex than that of Options, especially for scalpers and swing traders. On the other hand, the tax treatment of Options is far more complex and takes into account the length of the trade and whether the trader was the writer or holder of puts or calls.

Futures contracts futures and futures options options are two ways to trade in the commodities market. The key difference between futures and options is that futures contracts require you to buy or sell the commodity, where futures options give you the right to buy or sell the futures contract without the obligation.

Think of the world of commodities as an upside-down pyramid. At the very bottom of the structure is the physical raw material itself. As you move up the inverted pyramid through the derivatives , all the prices of other vehicles like futures, options, exchange-traded funds, and exchange-traded notes are derived from the price changes of the physical commodity at the bottom. Futures contracts are derivatives of commodities. This means that traders and speculators do not need to take possession of the physical goods when they complete their transactions.

When you buy or sell a future, you take on the obligation to conduct the transaction when the expiration date is reached. Futures options are another type of derivative. Options are also known as "futures contract options," which might better describe the derivative.

Futures options are basically choices that you can purchase on a futures contract. An option gives you the choice to buy or sell the futures contract. Futures contracts have delivery or expiration dates, at which time they must be closed, or delivery must take place.

Futures options also have expiration dates. The option, or the right to buy or sell the underlying future contract, lapses on those dates. A "put option" is the right to sell at a certain strike price, while a "call option" is the right to buy at a certain strike price. You purchase a future call option or future put option to conduct the trade in the direction you think the prices will move. Futures contracts are the purest derivative for trading commodities; they are as close to trading the actual commodity you can get without trading one.

These contracts are more liquid than options contracts. This means that futures contracts make more sense for day trading purposes. There's usually less slippage than there can be with options, and they're easier to get in and out of because they move more quickly. Futures contracts move more quickly than options contracts because options only move in correlation to the futures contract. Futures options are a wasting asset. In other words, options lose value with every day that passes.

This is called time decay, and it tends to increase as options get closer to expiration. Many new commodity traders start with options contracts. Trading options can be a more conservative approach, especially if you use option spread strategies. The chances of running a negative balance are slim if you only risk a small portion of your account on each trade.

Brokerage firms have various rules about opening an options account, but the majority will require approval to open one that is largely based on an investor's past experience with trading similar to trading futures. Options are also traded on exchanges such as the Cboe and have myriad products such as the VIX index, stock indexes, mini, weekly, end-of-month, quarterlies, strategy benchmark indexes and social media indexes.

Novice options traders can conduct "paper trading" on the simulated platforms of the brokerage firms until they understand how the markets react to news, economic statistics and earning of companies.

There are various types of options to purchase. The most common ones are calls, puts, long-dated contracts and short-dated contracts. There are some options contracts that are complex, such as the butterfly , iron condor , straddle and strangle. The amount of capital that an investor can lose is much greater compared to purchasing a stock or stock index or ETF. The options market is open nearly 24 hours a day, which means news from another country can affect stock prices and a trader also has the potential to put more capital at risk.

One popular mistake that some individuals make is believing that it is necessary to hold onto a call or put option until the expiration date. Options give traders the opportunity to exercise the contract immediately.

For example, if the underlying stock rises quickly and the investor can either double or triple their call or put option's value, there is no need to wait until the end of a monthly contract, such as 25 days. Another mistake that some investors make is believing that a cheaper option is the better choice.

Instead, it can mean that the options contract is riskier and the profit could be less if the trade goes sideways. Adding either futures contracts or options to your portfolio can be challenging and risky. Depending on your risk, amount of liquidity and when you want to retire, determining one that is suited for you is tricky.

Being more conservative in your trading strategy for both futures contracts and options is a good rule of thumb to follow to avoid losing large amounts of capital. Other retail investors who do not want to cope with the higher degree of risk opt to defer their decisions to a financial adviser who has demonstrated expertise in trading these more complex assets. Receive full access to our market insights, commentary, newsletters, breaking news alerts, and more. I agree to TheMaven's Terms and Policy.

Both of the markets are more complex than the stock market and often experience more volatility. Advantages of Futures The futures market gives investors exposure to commodities such as coffee, cocoa, natural gas or crude oil while also diversifying their portfolios.

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