Online Stock Market Trading – Comparing Options and Futures Contracts

The words “options” and “futures” are used reciprocally in trading. These are actually two opposite items. Transposing them while transacting trades can have devastating implications for an investor.

There are differentiating features to options and features contracts. This article will detail those dissimilarities to assist the investor in avoiding the wrong terminology. Hopefully, the information will help prevent mistakes and increase profitability.

Options Contract

An options contract is binding for a specified period of time. An option provides the investor with the right to purchase or sell a certain number of stocks, currencies values or commodities. The investor is not obligated to exercise the rights obtained through the contract. The investor is restricted to buying and selling the commodities at a fixed price.

Futures Contract

A futures contract requires that the rights obtained by the investor be exercised. Delivery of the stock, currency or commodity must be made. The delivery of the trade is made by a fixed price and must be done on or before the expiration date of the contract.

All conditions must be exercised in a futures contract wherein, in an options contract, the investor has the capacity to decide whether to exercise the conditions.

Options and Futures Differences

Besides the basic differences between options contract and futures contracts regarding rights and obligations, there are several other distinctions between the two. These include commissions, amount of underlying stock or commodities and the manner in which gains are realized.

An investor can sign into a futures contract without full payment upfront, whereas the investor must pay a premium to the contract holder before taking hold of an options contract. This option premium is payment in consideration for the investor’s right not to be obligated to purchase underlying commodities. This is of importance when there have been unfavorable price changes.

Trades of the size of underlying commodities is another major disparity between options and futures contracts. Futures usually have larger sizes than options. Because futures have larger sizes, it is riskier for an investor to trade as he exposes himself to a far greater loss.

The final deviation between the two agreements is realization of gains. Gains in options contracts are realized by one of three methods. The investor can exercise his option, buy a completely different option or collect the difference between the price for the asset and strike price on the expiration date. Holders of future contracts are only able to realize profits by an opposition position or at the finish of each trading day through the instant change in the value of positions.

Learning the specifics of options contracts and futures contracts, and understanding how each operates, will assist the investor in avoiding making mistakes that can have profound effects. Always conduct research prior to trading. Know the rights and obligations of the particular contract you are committing to, the amount of commissions payable, the size of underlying commodities you are exposing yourself to and how realization of gains are permitted.

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