Thursday, May 10, 2012

Options And Futures Trading Differences

Many people are confused between options and futures trading. They thought both meant the same thing. These investment options are considered by some people to be quite risky. On the other hand, a proper understanding make it possible to profit. Those who use options and futures need to understand all the risks involved.
What Are Futures

In futures trading, the future price of a bond futures, stock index futures or a commodity futures is fixed. A trader agrees to sell while another trader agrees to buy the contract at the fixed price on the predetermined expiry date.

On the expiry date, if the futures contract is trading at a higher price than the agreed future price, then the buyer makes profit. However, if the futures contract is at a lower price, then the buyer makes a loss.
What Are Options

There are two different types of option contracts – calls and puts. The first is bought in anticipating that there will be an increase in the price. The put options are generally bought when the investor expects the price to decrease in future.

In the case of options trading, we can think of replacing options as futures in the previous example. The key difference is that options are really a right to buy or sell. When the buyer bought an option that makes money, he can exercise this right to get the underlying item in the option contract. However, when he made a loss, he can do nothing about it. His loss would only be limited to the money he paid for buying the option contract. In the case of futures, the buyer got to take physical delivery or close his position by selling the futures contract.

In this aspect, trading in futures is considered somewhat more risky than options trading. In  futures trading, the buying trader can decide to take physical delivery of the assets, and go for the cash settlement, or choose to take the other side of the agreement.
Futures Trading Involves Physical Delivery

In futures trading, one party faces higher risk. This is because both buyer and seller need to sell or buy the assets at a fixed price on the contract expiration date.

Another difference is that in options trading, an option premium have to be paid upfront. Whereas in futures trading, the buyer used leverage in his trading account and no advanced payment is required. Generally the value of the futures contract is quite huge, such as 100k per standard contract. Many investors prefer dealing in futures because of this advantage.

These are the important considerations about both investment options, and it is important to know about them.
Secret To Options and Futures Trading Profits

It is better to trade after understanding the trends. Investment only be made if there is a high chance of making profit. One needs to avoid any emotional attachment and work according to a proven trading plan. Such a plan should have proper goals as well as exit and entry points. As futures is a riskier proposition compared to other investment options available in the financial market, use only the spare money, losing which will not cause any financial problem. All the reward and risk options must be evaluated properly. When it comes to options and futures trading, investors are advised not to over-trade.

Best Futures Trading Tips

Every futures trader's goal is to achieve the best futures trading possible. This is because futures trading is very fast paced, with high risk and stake involved. Most of them use a futures broker and the trading platform provided by the brokerage to execute trades. A good brokerage offers invaluable research reports and free educational products.
What Is Futures Trading

This type trading involves the exchange of an asset in accordance to a standardized contract at an agreed price today but with a delivery date sometime in the future. The price of the asset may change between the contract date and the delivery date. With the contract price already been agreed upon, the change will result in a profit or a loss when it is settled on or before the expiration date.
Always Close Futures Contracts Before Expiration

Delivery of the asset almost never occurs as futures contracts are always closed out before the delivery date. Futures trading involves forecasting the future direction of prices of the underlying assets.

The buyer is hoping the price goes up and the seller is hoping the price goes down. Traders attempt to figure out the direction of future price movements by studying the markets using technical analysis and fundamental analysis.
Choose The Best Futures Broker That Is Suitable For Your Needs

A trader should conduct a detailed research on brokers, and trading platforms before deciding on a broker. What worked for one trader may not be the best for another. Every broker is different; some may offer full services and charge a higher commission. Discount brokers charge lower commissions and offer lesser services. The trader must understand what is needed in a broker.
Determine Your Style Of Trading

The trader needs to find his or her style of trading, for example, are trades based more on technical analysis or fundamental analysis. A broker that specializes in the same type of trading style can offer relevant market information.

If trades tend to be closed out quickly, within the same day or even hour, the trading platform must suit this type of trading.

Futures trading is always evolving with the changing market conditions. A supportive broker that provides the educational and research resources is like your research partner in your trading career.

At the end of the day, futures trading is a thinking man's game. Besides all these tips, each trader must decide how to achieve their best futures trading themselves for achieving the greatest profits possible.