After spending a lot of time explaining the differences between options trading and futures trading to derivatives trading beginners, I think it’s time to address the similarities between options trading and futures trading. Is Options Trading And Futures Trading Really That Different? What are some of the similarities? Well, there are actually four main areas where options and futures are similar.
First of all, options and futures are derivative instruments. This means that both are simply contracts that allow you to trade your underlying asset at certain specific prices, whereby their value is derived from the price movements of your underlying asset. Both options and futures are simply contracts that link the exchange of the underlying asset to a specific price. Without an underlying asset, options and futures would have no value to their existence, which is why they are known as “Derivative Instruments”. Options and futures exist in order to facilitate the trading of your underlying asset.
Second, both options and futures are instruments of leverage. This means that both options trading and futures trading give you the ability to control the price movement in more of your underlying assets than your cash would normally allow. For example, a futures contract with a 10% initial margin requirement would allow you to control ten times the amount of your underlying asset than your cash would normally allow. A call that asks for $ 1.00 on a stock that is trading at $ 20 has twenty times leverage, as it allows you to control a stock that is worth $ 20 with just $ 1. Leverage also means that you could make more profit with options and futures on the same movement in your underlying asset as you would if you bought the underlying asset with the same amount of cash. Of course, the leverage cuts both ways. You could also potentially lose more than you would lose on futures and options trading than you would if you simply bought the underlying asset.
Third, both options and futures can be used for hedging. Hedging is one of the most important uses of derivatives. Both futures and options can be used to partially or fully hedge the directional price risk of an asset, although options are more versatile and accurate as they allow what is known as delta neutral hedging, which allows a position to be completely hedge continues to make a profit in the event that the underlying. asset stage a sharp breakout in either direction. The hedging power of options and futures is also extremely important in reducing the downward pressure faced by the broader market during the market crisis because large funds and institutions can hedge the downside risk of their holdings using options. and / or futures instead of selling your shares in order. to maintain the value of your account. By reducing the amount of sales these large funds make, the downward pressure on the overall market is partially alleviated. Of course, this alone doesn’t stop bear markets from forming when the general retail crowd (also known as the “herd”) starts running out of the market.
Fourth, both options and futures can be used to profit in ways other than movement in the price of the underlying stock itself. Futures spreads can be used to speculate on seasonal price differences between the price of futures contracts of different expiration months and option spreads can be structured to benefit from temporary impairment no matter which way the underlying asset goes. Yes, it is these options strategies and future strategies that make derivatives trading so interesting and so rewarding for people with the gift of math and math strategies.
Therefore, although options and futures are very different derivative instruments and have very different trading rules and characteristics, they are still very similar in the areas above and you can be a more complete and savvy trader or investor if you understand how to use both. options and futures in your favor.