Options vs. futures: Five advantages

Futures Vs. Options: Which To Invest In - TheStreet

1. Investment that pays off

Stocks may not be the best way to trade futures, but commodities, currencies, and indexes are excellent options. They are particularly useful for risk-tolerant retail investors due to their high levels of leverage and standardised features. They are able to participate in markets they wouldn’t have been able to otherwise due to the high leverage.

2. Costs fixed up front

Margin requirements for major commodities and currencies have been relatively unchanged for many years. An asset’s margin requirements may be temporarily increased when it is particularly volatile,companyfutures.org but they usually remain the same from year to year. Thus, a trader knows how much initial margin needs to be placed in advance.

An option buyer’s premium, on the other hand, can be affected by market volatility and the volatility of the underlying asset. A buyer of an option pays a higher premium if the underlying or broad market is volatile.

3. Time does not pass

Futures have this substantial advantage over options. The value of options declines over time because they are wasting assets-a phenomenon known as time decay. One of the most important factors affecting an option’s time decay is the time until expiration. Time decay is a factor that options traders should be aware of because it can significantly erode their profits or turn a winning position into a losing one.

Time decay does not affect the future.

4. Fluidity

Futures offer this advantage over options as well. There is a high level of liquidity on most futures markets, especially in the most commonly traded commodities, currencies, and indexes. Bid-ask spreads are narrowed and traders feel confident about entering and exiting positions at the right time.

In contrast, options may not always have sufficient liquidity, especially when the strike price is far from the expiration date or when the options expire far in the future.

5. Transparent Pricing

Futures pricing is intuitive and easy to understand. A cost-of-carry pricing model assumes that the futures price is equal to the spot price plus the cost of carrying (or storing) the underlying asset until the maturity date. Arbitrage activity would occur if the spot and futures prices are out of alignment.

In contrast, option pricing is typically based on the Black-Scholes model, which is notoriously complicated and difficult to understand by the average investor.


Futures have a number of advantages over options, including suitability for trading certain investments, fixed upfront cost, lack of time decay, liquidity, and an easier pricing model.

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