Trading Futures Vs Options | Differences and Similarities

Getting to grips with trading derivatives

Like the CFDs available at our CAPEX.com site, both futures and options can be used for a variety of assets, although they are all derivatives of the underlying asset itself. This means that you aren’t actually buying or selling an asset like a stock, commodity or cryptocurrencies, but are trading on its value.

As such, derivatives trading might strike some newcomers as being fairly counterintuitive. However, the contracts for difference (CFD) model of trading at our CAPEX site is quick and easy, and it could provide a good crash course before getting to grips with more complex derivatives such as options and futures.

How do those instruments work?

How do futures operate?

Entering a futures contract means that you have an obligation to buy or sell an asset at a fixed date and price. Futures are commonly associated with commodities such as oil. This means that an oil producer may try to lock in a fixed price with a seller to act as a safety net should the price suddenly drop in the intervening period. Conversely, futures act as a kind of insurance for the buyer should the price of oil skyrocket after the futures contract closes. It’s a different kind of derivative to the CFDs featured at CAPEX, but futures can also be used for a variety of assets for everything from stocks to indices like the S&P 500.

Understanding how options work

Options come in two different types which are long and short options. Of these two, long options are seen to be less risky as you’ll only be risking the premium paid to effectively ensure that the buyer doesn’t have to pay over the agreed price of an asset. This means that you have the right, but not the obligation to buy an asset such as a stock. Like the CFDs at CAPEX, options are derivative in that they won’t actually see you owning the underlying asset.

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Key differences of trading futures vs options

When looking at trading futures vs options, we can see that they are both a form of an arrangement to trade a particular asset. The major difference between the two is that options are more flexible than futures. This is because options basically give you the right to buy or sell an asset without having to necessarily do so. Conversely, futures will tie you into buying a particular asset at a fixed time and price.

When discussing trading futures vs options, it might be helpful to think of them as futures contracts and futures options as this highlights the differing levels of obligation you’ll face.

While options are the more flexible of the pair, the CFDs available at CAPEX offer even more flexibility for hundreds of assets. But all of these are derivatives which means that the price will be derived from the underlying asset itself. So while there are plenty of differences between futures and options, there are enough similarities to make both products worth knowing.

Which one is better, futures or options?

Why futures might be better than options

Many people prefer trading futures vs options as futures simply hold their value more over time. The fact that prices move more in a futures contract means that there is more liquidity generated compared to options. Futures are commonly associated with navigating the volatile commodities markets, but they can also be successfully applied to anything from indices to stocks. Ultimately, futures give you a simpler way to control price movement as this kind of product isn’t subject to the kind of time decay that you experience with options.

It’s important to note that futures will have fixed trading costs up front. This means that you’ll always know how much you’re paying up front which is definitely not the case with options premiums. Buying options on volatile markets may see the premium vary dramatically, which is something that you don’t have to worry about with futures.

Reasons why options could be a smarter investment than futures

It’s essential that you consider how flexible you want to be when looking at trading futures vs options. The flexibility is a key part of why options trading could be better than futures. After all, you’ll only be hit with the maximum loss of your premium when you’re involved with options. It’s an effective way of taking reasonable control of an asset’s price without tying yourself in too early. As such, options trading can be an invaluable strategy to try when looking at volatile markets such as stocks.

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Top strategies for futures and options

If you’re new to options and futures, you may wish to start with options as it offers you a fair amount of insurance in that you’ll only ever lose your premium. This is definitely something to be factored in when considering how to use any spread strategies. These are often used when it comes to certain commodities like agricultural raws where you’ll be playing different contracts off against each other.

Once again, the element of time should always be factored in when buying options, as time decay can work against you. However, it’s worth noting that this can be countered by using an option selling strategy. Here’s where you sell options when they look like they might be losing all of their value. Not easy, but a good way to get something back from those options trades.

Conclusion – Enjoy trading derivatives at CAPEX

Now that we’ve identified the differences of trading futures vs options, we can see that both involve trading derivatives of the asset, rather than the asset itself. As such, both futures and options are like the CFDs on offer at CAPEX.

Options give you the flexibility to move in and out of a buying or selling contract, whereas futures locks you into the purchase or sale. While the flexibility of options should not be discounted, buying futures generally holds greater value over time.

Discussing futures vs options reveals the fact that both of these derivatives will require a fair amount of expertise and skill. As such, it might be best to sign up to CAPEX and get started with the CFDs that are on offer so that you can see how derivatives work for hundreds of trades on commodities, stocks, cryptos and much more.

Trading Futures vs Options – FAQ

🤔How do I trade futures?

⚡What are the advantages of options over futures?

✅What are the futures trading basics?

💪Futures vs options, which is better?

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Trading Futures Vs Options Differences and Similarities

Learn all about options and futures trading at CAPEX

Getting to grips with trading derivatives