Trading Futures Contracts And Options – Comparing The 2 Types Of Contracts

August 25, 2013

In trading, it is fairly typical for the terms options contracts and futures to be used transposably. Though these 2 contracts have a large amount of likenesses when it comes down to principles, they are actually 2 very different things and therefore interchanging them when conducting trades in the market could be a awfully fatal mistake for anybody.

Let us learn the differences between these 2 contracts to forestall making the wrong choices in buying and selling rights for stocks or commodities. Through this, we may just be able to stop hazards and maximize possibilities to earn profits.

What Is An Options Contract?

An option is essentially a right to sell or purchase a particular amount of stock, currency, or whatever commodity offered in the market. This contract basically allows an individual to enjoy, but to necessarily become obligated, to exercise these rights. This contract can only really be valid for a specific period, and commodities traded can only ever be acquired and sold at a certain set price.

What's A Futures Contract?

Alternatively, a future is a portable contract that needs the delivery of a certain stock, currency or whatever commodity traded. Like a choice, the delivery of the trade is done through a precise price stated in the contract and within a timeframe, so one shouldn't go past the best before date.

However , it is highly important to take note that a holder is obliged to exercise the conditions of the contract unlike in options where the holder can have the liberty of deciding.

The Differences Between Futures And Options

Apart from the basic difference between the 2 contracts on rights and requirements, there are also other differences that include commissions, the size of underlying stocks or commodities traded and how gains are realized.

In a futures contract, a stockholder has the freedom to sign into the contract without paying up front. Nevertheless a stockholder cannot take hold of an options position without paying a premium to the contract holder. The option premium therefore serves as payment for the concession to not become obligated to get the base commodities in cases wherein there are unfavorable shifts in prices.

Another significant difference between futures contracts and options is also the size of the underlying positions that can be traded. Often, future contracts would include much larger sizes for the underlying positions as compared to that incorporated in options contracts. Because of this, the requirements included in futures make it riskier for a contract holder to trade because of the possibility of losing so much.

Finally, the 2 contracts vary with how gains are received by parties concerned. For options contracts, gains can be attained in 3 methods. Either the holder exercises the option, purchases an opposite option, or waits until the expiry date arrives to be well placed to collect the biggest difference between the price for asset and the strike price, so she could get profits. Nonetheless profits for commodity contracts can only be realized by either taking an opposition position or through the instant change in the value of positions at the end of each trading day.

Knowing about the differences between an options contract and a futures contract can help broaden your understanding in stock trading, and this could certainly hinder you from making the incorrect calls if ever you decide in joining this arena.

Do not forget to never trade without doing your research and completely understanding what contracts you are dealing with. If you simply take the additional step to acquaint yourself, then you simply might be well placed to spare losing so much money.

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