Trading Options And Futures - Comparing The Two Types Of Contracts
Let us learn the differences between these two contracts in order to prevent making the wrong decisions in buying and selling rights for stocks or commodities. Through this, we may just be able to prevent risks and maximize chances for profit.
What Is An Options Contract?
An option is basically the right to buy or sell a specific 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 be valid for a specific period of time, and commodities traded can only be bought and sold at a certain fixed price.
What Is A Futures Contract?
On the other hand, a future is a transferable contract that requires the delivery of a certain stock, currency or whatever commodity traded. Like an option, the delivery of the trade is done through a fixed price stated in the contract and within a time frame, so one should not go beyond the expiry date.
However, it is very important to take note that a holder is obligated to exercise the conditions of the contract unlike in options where the holder can have the liberty of deciding.
The Differences Between Options And Futures
Aside from the fundamental difference between the two contracts on rights and obligations, 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, an investor has the liberty to sign into the contract without paying upfront. However, an investor cannot take hold of an options position without paying a premium to the contract holder. The option premium therefore serves as payment for the privilege to not become obligated to purchase the underlying commodities in cases wherein there are unfavorable shifts in prices.
Another major difference between options and futures is also the size of the underlying positions that can be traded. Usually, futures contracts would include much larger sizes for the underlying positions as compared to that included in options contracts. Because of this, the obligations included in futures make it riskier for a contract holder to trade due to the possibility of losing so much.
Lastly, the two contracts differ with how gains are received by parties involved. For options contracts, gains can be attained in three methods. Either the holder exercises the option, purchases an opposite option, or waits until the expiration date arrives to be able to collect the difference between the price for asset and the strike price, so he or she could get profits. However, profits for futures 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 knowledge in stock trading, and this can surely prevent you from making the wrong decisions if ever you decide in joining this particular arena.
Remember to never trade without doing your research and fully understanding what contracts you are dealing with. If you just take the extra step to acquaint yourself, then you just might be able to spare losing so much money.
Comments
Menu
My Articles
What You Should Know About The Stock Trading RobotThe Advantages Of Online Stock Trading
Stock Option Trading - Starting Out On The Basics
Stock Trading Computers - Are They Always Helpful?
The Difference Between Trading Stocks And Stock Options
The Basics On Stock Trading
Factors That Influence Forex Market Trends
Getting Smart On Day Trading
Introduction To Forex Trading
Stock Trading - When Should You Sell Stocks?
Finding The Right Online Stock Broker
Stock Trading Software: How Does It Help You?
Comparing The Two Types Of Investments
What You Need To Know About Day Trading
Tips For Online Stock Trading
Improving Your Chances In Stock Trading
The Advantages Of Trading Stock Options
Making A Smart Stock Investment
Familiarizing Commonly Used Stock Market Terminologies
The Problem With Penny Stock Trading
Stock Options - Comparing The Two Types
Trading Options And Futures - Comparing The Two Types Of Contracts
Related Sites | My Articles Making A Smart Stock Investment The trends in stock trading are very volatile and consistently fluctuating... A Guide To Trading Futures In the stock trading industry, many people have garnered a.. Getting Smart On Day Trading Day trading is a very controversial endeavor to take on in the.. Stock Options - Comparing The Two Types The trade for stock options is fast on the rise in the market these.. |
|
|
Related News:
|