PostHeaderIcon Trading Tips: Options Versus Futures

shutterstock_187977734Trading and investing both come with accompanying risks. People need to acquire enough knowledge in order to be good investors and traders. Count in some experience and you get to become more perceptive in playing the markets. There are different types of securities that people can put their money into. Aside from stocks, there are also options and futures trading that can provide additional opportunities for the savvy investor or trader.

Options and futures are considered as second-level securities based on stocks and commodities. It provides an opportunity for investors and traders to potentially earn more down the line. An option is a contract that allows a person to buy or sell a stock at a stated price at a certain time. Options to buy a stock are known as “calls” or “call options” while selling options are known as “puts options” or simply, “puts”.

A call option allows traders to buy a certain stock at a particular price during a stated time period, regardless of how a stock is currently performing. Traders hope to get a call option when they believe that a certain stock price going up and will possibly go up further in the future. They may consider a call option to buy shares of stock at a subsequent time for a stated price. If the stated price is lower than the current share price of the stock when the trader exercised the options contract, he gets to profit by buying it low and selling it high.

A put option is a right to sell a stock at a stated price during a stated period of time. Those who get a put option usually expect a stock price to go down in the future. If the stock price is lower than the stated selling price when the put option is exercised, traders get to profit from the difference.

A futures contract, on the other hand, involves trading in commodities, although it can also include currency and stock trading. Futures first originated from the agricultural sector as a means to protect farmers from the effects of falling crop prices. A futures contract enables farmers to set a specified unit price to a crop harvest in the future. If a farmer expects that the price of the crop is going to fall come harvest time, a futures contract can help secure that he does not go bankrupt. It may also work against the farmer if the crop prices actually go up. But at least, it prevented the farmer from losing money and pocket a bit of profit. Since then, futures contracts have extended to other sectors including the financial market, energy and even precious metals.

While futures and options contracts almost the same, they also have their differences. The main difference between them is that a futures contract comes with an obligation to buy or sell at the stated time. Options carries lesser risk since investors are never obligated to lose more than the option price. One other thing, futures trading usually involves large and institutional movements. An individual does not usually have the means to afford buying a futures contract, considering that it may involve a huge harvest or supply base. Brokers usually are required to handle such large deals, from which smaller investors try to stake a claim. Options, on the other hand, are more accessible to the ordinary investor since it requires a few dollars to buy options.


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