Futures are commodities that are bought and sold at a fixed price for a fixed date. These commodities, and financial products are also traded on the basis that the investor or trader will bear the cost if there is any difference in price.
Options are also derivative instruments. They get their value from an asset. When trading in options, there is no obligation on the buyer to actually sell the asset at a given date. The buyer can sell the product, but there is no compulsion on when to sell.
They can both be traded online through apps like the Infinity app. However, that doesn’t posit an advantage or a disadvantage.
However, there are significant advantages of futures over options. Let’s have a look:
- Futures are great for specific investments – if one were to trade in stocks, for example, it might not be the best idea to trade in futures. However, if you are trading in commodities, indexes or even currencies, then, trading in futures is better than trading in options. Since futures have standardized features, they are an ideal investment for those investors and traders who are risk-tolerant. Since futures also have a high leverage, investors usually get access to markets they didn’t before.
- Fixed costs – There are certain things about futures options that haven’t changed in years and years. Among them is the margin requirement especially for commodities and currencies. When an asset (like a currency) is volatile, the requirements might change, but this happens very rarely. When trading in futures, a trader knows the amount to be invested.
- Time is not a factor in its value – with futures, there is a fixed time of delivery. Which means that a commodity will be traded or bought or sold at a specific time. There is no workaround with his fact. However, options decline in value over time, also known as time decay. If an options trader does not pay attention to this fact, they will find themselves in possession of an asset that no longer has any value. This is a loss for them. However, a futures trader knows the time within which the trade will happen and this doesn’t change.
- Liquidity – when it comes to commodities and currencies, the futures markets are very liquid. Especially if these are common markets at which these are traded. Because of this traders have are reassured that they can enter and leave when required and will not suffer too much for it. With options however, liquidity is not a given. Since there is the problem of time decay associated with them as well, options prove to be the better bet when they are at their peak value and not a day later than that.
- It is easier to understand – if you’re trading in agricultural futures it is so easy to understand and trade in. With options however, the math is a wee bit more complicated and takes people a long time to work out.