Options Trading vs. Futures (2023) - For Beginners (2023)


Futures and options have a lot in common.Both offer unlimited opportunities to earn money and are extremely popular with retailers. Most notably, both are derivatives, meaning they derive their price from another asset. Deciding to trade one or the other can make a lot of sense as the way the two instruments are traded and their markets are very different.

But before you can make that call and decide which financial instrument is most likely to bring you a profit, you need to fully understand both. In addition to providing a quick refresher on what futures and options trading is all about, we've compared the two to help you choose between the two.

What is options trading?

optionsThese are contracts that give the investor the right to buy or sell shares at a specified price at a later date. As you are under no obligation to buy or sell anything,You risk less capitaland have the opportunity to earn more money.

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Options take two forms:

The call option:

These options give you the right to buy a stock, bond, commodity or asset at a set price within a specified period of time. You should use them when you think the price of an asset is going to go up.

Selling options:

These options give you the right to sell a stock, bond, commodity or asset at a set price within a specified period of time. You should use them when you think the price of an asset is going to go down. An expiry time is set when you receive an options contract.

if you get oneamerican style optionsIf you contact us, you can exercise your right to vote at any time before it expires. On the other hand, if you get aEuropean style option, you can only exercise your option at expiration. American-style options, while much more flexible than European ones, are also more expensive.

To end the contract, you can either sell your option to another trader before it expires or execute the contract. If you abandon the option and do not renew it, it will expire and will not bring any benefit. The prize is wasted, but you don't lose any more money.

What is futures trading?

futuresThey are essentially contracts that represent an agreement where two parties, a buyer and a seller, exchange an asset for an agreed price at a specified time.The main difference between futures and options is that with an option you don't have to trade anything, but you have the right to trade.. In a futures contract, you are obligated to trade with the other party when the contract expires, whether you are buying or selling.

Options Trading vs. Futures (2023) - For Beginners (2)

A trader can also close a futures position by buying or selling an identical contract. Futures markets involve a lot of leverage. Traders are not required to pay in full and upfront for the asset they are purchasing. Only a percentage of the order amount has to be paid. You can trade stocks, commodities, currencies, government bonds and indices with a futures contract.There are two ways to use a futures contract: speculating and hedging.:

  • speculate:Speculation is when a trader bets on the price of an asset. If you think the price is going to go up, you can buy a speculative position. If you think the price is going the other way, buy a short position.
  • Here:A futures trade to limit losses in the event of a price change isCall Coverage Operation. Suppose a farmer enters into a futures contract to sell his coffee. As the price remains fixed in the contract, a future drop in the price of coffee will not affect the coffee grower's business.

Initially, farmers and traders used futures contracts to commit to future transactions, hence the name "futures". The advantage of such agreements was that both the trader and the farmer were unaffected by price changes. But now,Traders also use futures to speculate.. These traders have no intention of owning the underlying asset and opt for cash settlement.

Differences between options and futures

At first glance, options and futures contracts don't look very different. However, there are several differences between them, all of which are contrasted below.

Buying a contract: premiums and margins

When you enter into an options contract, you must pay a fee known as a premium. The premium is essentially the contract price paid to the seller or insurer of the contract. By convention, an option contract represents a commitment of 100 shares. On the other hand, if you enter into a futures contract, you must specify the initial amountRandyour positionThe value of this margin varies from contract to contract and is defined by the exchange. It is usually between 3% and 9% of the order amount.

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In addition to paying margin, the trader must also have maintenance margin in his account until the contract is sold or closed. The required minimum margin amount is specified in each futures contract. Entering into a futures contract also involves the mark-to-market process, where the margin balance is adjusted daily in your account.Position profit or loss is calculated at the end of each trading dayand transferred/withdrawn from the merchant account balance.

Note that the margin may fall below the minimum margin level, in which case a margin call will be generated. The trader must transfer the necessary funds to his account, and if he fails to do so, the position will be liquidated. The remaining payments and commissions are settled when the futures contract closes.

To use:

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The margin you have to pay to enter a futures contract can run into the thousands. In contrast, option premiums are typically less than $100.

Risk and Leverage

The only risk is the reward. The risk is predefined and capped, so you know exactly how much you would stand to lose if things didn't go your way.Selling options contracts, on the other hand, is much riskier.The risk for the option writer (the seller) is practically infinite, as it is unknown how much the price would go up. That said, the chances of winning a trade are much higher when you sell options than when you buy them.

The value of a contract is determined by the value of the asset being traded. Whether you're on the buy or sell side of the contract, there's no telling how much you stand to lose (or gain). Furthermore, as futures use leverage, both parties are exposed to a much greater level of risk.Although options contracts also make use ofto enjoy, the risk assumed by those holding futures contracts is much greater, as the leverage is also much greater.

You can take a futures position with 10x leverage. This can exponentially increase your profits, but at the same time you also risk losing a significant part of your capital.


The Financial Industry Regulatory Authority enforces the standard day trader rule. The rule applies to most securities, including options. If you have less than $25,000 in your trading account, the rule will apply and limit the number of trades you can place in a day.

If you want to trade more than four trades a day for five consecutive days, as day traders do, you need to add $25,000 to your trading account. The PDT rule does not apply to futures options as they are not regulated by FINRA.

What is FINA?

The National Futures Association regulates futures and does not impose such restrictions.

decadent time

As an option contract approaches expiration, its value is likely to decrease as the likelihood of the option making a profit steadily decreases.

Futures contracts are not affected by time decay becauseboth parties are obliged to act at the end of the contractual period. Whether you enter trading a day or a year before expiry, you don't have to consider the time lag and worry that it will affect your trading.

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Liquidity and overnight trading

The US stock market is open from 9:30 am to 4:00 pm, when options are traded. While many brokers now facilitate after-hours trading, using them is not ideal for traders as contract liquidity is highest when the market is open. Trading after hours is also not a good idea as price movements are more unpredictable.Slideis increasing and the bid and ask spread is much wider.

Futures markets are open for trading 24 hours a day, and because the markets are strong and liquid, you don't have to deal with the hassles associated with options trading.Futures trade in high volume every day, including holidays, which means you can easily enter and exit your positions at any time.. Offshore traders and those who work a 9 to 5 prefer to trade futures over options for this reason.

cost effectiveness

There is no limit to the amount of money you can earn with options and futures. Both contracts can be equally profitable. Knowing this, deciding between the two can seem difficult. If you are confused between the two, remember that trading futures contracts is much riskier than trading options. Futures contracts involve a large amount of leverage andTrading with them is not suitable for inexperienced traders with low risk tolerance.. An unprecedented price change can wreak havoc on a trader's portfolio and even affect his well-being.

Only trade futures if you have a high risk tolerance, can manage risk properly, have always traded without emotion, and have the capital to back the trade up when it goes wrong. If you're new to trading and don't fit the mold, stick with trading options until you do.


Futures are subject to more favorable tax laws than options, which is good news for swing traders and scalpers. Futures tax laws are also significantly less complex. US tax law states that futures contracts must be taxed on a 60/40 basis of long-term and short-term capital gains rates. The duration of the operation is irrelevant.

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In other words,60% of your business income is taxed at the 15% long-term capital gains tax rate. All other income is taxed at the short-term capital gains tax rate of 35%. When you add up the numbers, you have to pay 23% of your futures trading profits to the government.

Calculating the tax you must pay for options trading is much more complicated. You should consider the duration of the trade, whether you are the issuer or holder of a trade, and whether you are dealing with a put or call option. The long-term capital gains rate applies when an option trade is held for more than one year. On the other hand, the short-term capital gains rate applies when a trade is held for less than one year. You should do your due diligence and consult a professional before starting to trade futures or options.

Step by step guides on futures and options trading

Both futures and options are risky contracts, and entering both can destabilize your portfolio. Navigating futures and options trading is both challenging and risky. There are several factors that you need to consider before choosing one. Consider your risk tolerance, how liquid you are, and also when you plan to retire.

If you are concerned about the complexities of trading, you can buy some index-based futures contracts, such as NASDAQ E-mini futures. They are easy to navigate. If you want to trade something that gives you the flexibility to sell at any time, you can buy options on quality stocks, especially technology stocks. Watching stocks in the S&P 500 and Dow Jones Industrial Average is also a good idea.A general rule of thumb is to take as little risk as possible.. Both futures and options are high-risk instruments that can land you in financial trouble. However, if you have the capital to handle high levels of risk and are working with professional financial advisors and traders, futures and options trading is not a bad idea.

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How to trade futures

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Step #1: Understand the risks

Futures trading can be stressful. But once you understand what to expect, you'll feel more comfortable taking risks. Remember that futures are leveraged financial instruments. This means that you pay a comparatively small amount upfront to control a much larger amount.

High leverage can increase your profits astronomically. However, it is a double-edged sword and will also amplify your losses. You can lose a lot more than you originally invested. Careful planning of your trades is essential before entering a position. Make sure you identify the profit target and have an exit plan ready for all possible scenarios.

Step #2: Sign up with a broker

Getting started with futures trading is much easier than you might think. You can open an account with a broker in minutes.AFutures Corridorwill ask you about your income, business experience and wealth. Questions like these help the agent to assess how much capital he can realistically risk.

It is important to ensure that the broker offers access to the markets that interest you. Since there is no industry standard when it comes to commissions and fee structures, there are a handful of brokers you should check out even if you think you've found the right one.There are several reputed brokerages in the industry., but each offers different services. While some provide great research tools, they may not provide a quote and chart. Some may offer graphics, but they won't help you with your search.

Many brokers offer traders access to demo accounts, which are accounts loaded with fake virtual currency. You can use this account to practice strategies and place trades in the market without risking any real capital on your trading account. If you have never traded futures before, we recommend that you spend some time using the demo account and familiarize yourself with the strategies before committing any capital.Even experienced traders use these accounts to test out new strategies..

Not all brokers offerdemo account. You must do your due diligence and only sign up with a broker that meets your needs.

Step #3: Choose the right market to trade

Always start trading futures on markets with assets, industries or sectors that you know a lot about. If you've been trading metals for a long time, trading gold futures might be the way to go. Start in your comfort zone and slowly and carefully venture into another market that you think will serve you well.

Aim to focus on no more than two markets, as this allows you to better focus your attention.Once you've decided on a futures market, start forming an opinion about the price movement.. Study the relevant news outlets, do some technical analysis and treat it like a stock trade. When you think you have a good idea of ​​where the asset's price is going, look at the futures contracts, identify them by size and duration, and find one that's right for you.

Step 4: Run and Manage the Operation

After you settle a futures contract, create an entry and exit plan. Also calculate the initial margin requirement to know how much you need in your account to place the trade. When it's all done and doneJustify the position by submitting an execution order. Don't forget to plan your exit strategy with a stop order, support order or other protective order.

While a protective order helps with risk management, you must remain diligent and be prepared to re-evaluate your exit plan if the market moves against you.

How to trade options

Options Trading vs. Futures (2023) - For Beginners (7)

Step #1: Sign up with a broker

Options trading is clearly not as easy as stock trading as there are more moving parts. You should brush up on your options trading jargon before going online and finding the right broker. Options brokers need to know more about you before allowing you to trade options. You will be evaluated and the broker will assess your trading experience, track record, net worth and much more.

After the agent assesses the level of risk you can take and your financial readiness, the details are documented in a commercial contract. Only after evaluation and documentation will your request to use a trading platform be accepted or rejected.

You might expect the broker to ask you to provide:

  • Details of your trading experience:It helps the company measure its investment knowledge. You also need to provide specific information, eg. B. How many trades do you make per year and the typical size of your trades.
  • Financial information:You need to calculate your net worth and consider investments that you can sell for quick cash. The broker also needs to know your assets and employment information.
  • Investment objectives:The broker will ask if you want to trade full time, grow your money, preserve your capital or just speculate.
  • Options types:The broker will ask if you intend to trade calls, puts or spreads. If you choose to be a seller or an underwriter, you are obligated to surrender the shares if the buyer exercises the option. You must inform the broker if you are hedging your trades in the underlying stock, ie if you are taking covered trades or if you are taking unprotected or 'naked' trades.

After collecting your responses, the broker assigns you a trading tier based on the highest level of risk you can take.

The selection process should never be one-sided.If you are interested in doing business with a broker, ask as many questions as you like. If the broker does not offer the research tools, guidance and support you need to make money, then the broker is not worth signing up for.

To use:

If you are new to options trading then you should be extra careful as the broker you use can make or break your chances of success.

Step 2: Choose the call or put options

Here's a quick refresher on the terminology you need to know:

  • A call option is an instrument that gives the trader the power to buy stock at a predetermined price. However, the trader can choose not to buy the shares.
  • A put option is an instrument that gives the trader the opportunity to sell stock at a predetermined price. However, the trader can choose not to sell the shares.

If you expect the price of an asset to rise, you can buy a call or sell a put to make a profit. On the other hand, if you expect the price of an asset to fall, you can buy a put option or sell a call option to make a profit.

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Step 3: Speculate on price movements

Regardless of which option you buy, it's important to remember that it only retains its value if the contract is "in the money". For call options, this means that the current price must be greater than the strike price for you to make money. On the other hand, if you have a put option, the current price must be lower than the strike price.

Before spending any money and buying a stock, make sure the strike price reflects your target price.

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Suppose you believe that the price of an asset currently trading at $100 will rise to $110 in one week. You can buy a call with a strike price of less than $110, and if the price rises above the strike price, your option is "in-the-money". You may not find a call option that sells for the price you want. However, as long as you ensure that the price does not exceed $110 minus the option price, your trade will still be profitable.

If you think the price of an asset trading at $100 will drop to $80, you can buy a put option. Make sure the strike price is above $80. If the asset price drops to $80, your option is "in-the-money". You may not find a put option that sells for the price you want. However, as long as you ensure that the price is not less than $80 plus the option price, your trade will remain profitable. Note that you cannot enter a strike price.The All Options brokerage gives access to an “options offer”.', which includes a range of strike prices. The strike price is calculated separately for each share.

However, increases in the strike price remain constant. For example, the increments between strike prices can be $1, $2.50, $5, and so on.

Step #4: Calculate the term of the option

Before entering a position, you need to calculate the expiration date of the contract. The expiration period is the last day you can exercise an option before it loses value. Just like you can't write a strike price,You also cannot specify an expiration date for your options contract.. You must choose from the limited number of options offered by your options broker.

One of the most important things to remember is that there are two styles to choose from: American style and European style.American style contracts are more expensive than European ones,However, give traders the flexibility to exercise the option at any time before it expires. Although European options are cheaper, you can only exercise your option on the expiration date. Because of this, European options are considered much more risky and most traders prefer to trade American-style options.

The expiration of an option can range from days to years. However, as mentioned above, options are subject to decay over time, and the longer the expiry, the greater the risk that the contract will not return a profit.Long-term traders can still take risks on monthly and annual option contracts. Time decay is a factor, but the longer expiry time gives the asset plenty of time to move.

There is also an opportunity to retain some time value even if it is trading below the strike price. If you see that the trade has gone against you, but there is still a long way to go before the contract expires, you can still sell the option and earn as much as your time value is worth. However, options that expire in one day and one week tend to be the riskiest, and if you've never traded options before, stay away from them.

Bottom Line: Is Futures or Options Trading Right for You?

Is futures trading right for you? Or is options trading much better for your portfolio? The answer to these questions isn't easy, but the first thing to consider is your risk appetite. While you don't necessarily have to choose between the two and you can trade both, if you are just starting your trading journey then options trading is for you as you are not risking a lot of capital.

Now that you've mastered options trading and understood the ins and outs, diving into futures contracts and taking on a little more risk is the way to go. Demo accounts can be extremely helpful in getting to grips with futures trading.

FAQ – Frequently asked questions about options vs. futures:

What's the Difference: Options vs. futures?

Futures are contracts that give the holder the right to buy or sell a specific commodity at a specific price on a specified future date. On the other hand, people who own options have the right, but not the obligation, to buy or sell an underlying asset at a specific price at a specific date in the future. This is the specific distinction between futures and options.

Which is better: options or futures?

Futures tend to have higher margins, appear easy to value and understand, and are generally more liquid than options. For these reasons, they seem to have an advantage over options. However, they are sometimes more complex to understand than the underlying assets they track. Futures carry a much higher level of risk than options, so you must be careful when trading them.

What brings you more profit: options vs futures?

Both options and futures have no cap on the profitable part and offer huge profits. But if you can't make a choice, you should always keep in mind that trading futures contracts always involves higher risk as it involves a lot of leverage. Beginners, therefore, should not trade futures contracts and prefer to stick with options.

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Last updated on Jan 27, 2023 byArkadi Müller

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