Investing in stocks can be highly profitable when done right. However, buying stock is not for everyone. Many people prefer using contracts to buy or sell an underlying asset at a fixed price in the future to avoid many of the risks associated with direct investment in equities.
Two types of futures contracts are commonly traded: futures and options on futures. An option to buy an underlying asset gives you the right but not obligation to exercise that right to buy or sell at a specific price in the future. In contrast, a futures contract obliges both parties involved to fulfil its terms at expiration regardless of market conditions existing then.
This article will compare trading futures vs options so potential investors can choose which instrument has more benefits for them depending on their investment goals.
Benefits and risks of trading futures
When you trade futures, you buy the right to purchase a specific quantity of an underlying asset at a predetermined price on or before a particular date in the future. Futures are often used to hedge against risk, but they can also be traded speculatively. The main benefit of trading futures is that investors get leverage, which means they can control a much more prominent position than their initial investment.
However, with this increased exposure comes increased risk, and investors must be aware of the potential for losses if the market moves against them. Additionally, futures contracts must be settled on expiration, resulting in large swings in prices if there is a significant movement in the underlying asset.
Benefits and risks of trading options
Options on futures offer investors many of the same benefits as trading futures, such as leverage and the ability to use limited capital to gain exposure to a much larger position.
In theory, owning an option instead of buying or selling a futures contract has several benefits because it limits your risk exposure until expiration. If the market moves against you, the most you can lose is the option premium price. However, in practice, options are often riskier than futures contracts because they are more sensitive to time decay and implied volatility.
Major differences between futures and options
There are two major differences between futures and options trading:
The first is that options give you the right but not obligation to buy or sell at a specific price in the future. In contrast, futures obliges both parties involved to fulfil its terms at expiration regardless of market conditions existing then.
The second difference is that options can be purchased as either calls or puts depending on whether you want the right – but not obligation – to buy the underlying asset or sell it at a certain price in the future.
Which instrument should you trade?
That depends on your investment goals. For example, if you want to hedge an existing position in a particular asset, trading a futures contract may be a better option because it locks in the current price.
Alternatively, if you’re looking to speculate on the movement of an underlying asset, trading an option may give you greater leverage and therefore increased profits potential. Ultimately, it’s important to consult with an experienced financial advisor to help you make the right decision for your individual situation.
Trading futures vs options in Singapore is an important decision for investors to consider. While both derivatives offer significant benefits depending on your goals, many people prefer the less risky nature of options trading because they give you limited exposure to changes in price. Ultimately, it’s important to consult with an experienced online broker to help you make the right decision for your individual situation. Saxo Bank offers demo accounts for beginner traders to try different trading strategies before investing their money. Visit Saxo markets and start your investment journey today.