Futures vs Options Trading: Which is More Profitable?

By Harshit Patel

July 9, 2021


With the popularity of options trading soaring as of late, there is a general misconception that options are a better option to trade than futures. This is not true, as both offer the ability to generate profits, however, the differences between futures and options are the main reason why one is more profitable than the other.

So, what should you do? Should you trade in options or futures? Who wins in futures vs options trading? Well, it depends. In this post, we will discuss futures vs options trading, which one is more profitable.

Trading futures and options – before we connect the dots, we need to understand what each of these financial instruments entails. But first, it is important to understand what ownership means.

Owning shares is like owning a share in a company. Shareholders have the right to vote and have a say in the management and operation of the company. Shareholders are partners in the growth of the company and in difficult times. You are entitled to dividends.

Now that you know the meaning of capital ownership, I will give you a basic definition of futures and options trading:

Futures vs Options Trading Comparison

Futures contracts are like forward contracts whose value is determined by the value of the underlying asset. For companies, the underlying asset is the share price; for an index, it is the spot price of the index. Holders of futures contracts have no ownership rights to the asset they are underwriting.

Futures contracts just drive their price value from the share price or the value of the index. You can buy or sell a futures contract – the margin requirement is the same for both.

Options, as the name suggests, allow the buyer to buy (call) or sell (put) on or before the expiration date of the contract. He buys this right from the seller of the option by paying a premium, and the option seller is contracted to oblige this condition.

In the case of Options, the main difference as compared to futures trading is that when you buy an option you pay less price (the premium only) whereas when you sell an option, the margin requirement is significantly higher.

The reason that I mentioned margin requirement as a difference in Futures vs Options trading is that this also explains the risk involved in trading these instruments.

Benefits of Futures Trading

Here are some key benefits of futures contracts:

  1. Since futures contracts derive their value directly from the underlying asset, any change in the price of the underlying asset is also proportional to the change in the value of the futures contract.
  2. A futures contract can be rolled over to the next monthly contract at the same price as the expiration price.
  3. With a futures contract, there is no problem with maturity over time because its value is directly proportional to the value of the underlying asset and maturity has no effect on its price.
  4. Liquidity is one of the most important factors in futures trading. With the current bid and ask prices, interested parties can easily enter and exit their positions.
  5. The margin required to trade futures contracts has not changed significantly in recent years. They change easily when the market becomes volatile. This way the trader is always aware of the margin required before taking a position.
  6. The price is easier to understand because the value is based on the cost of carry model, i.e., the forward price should equal the current stock price plus the cost of carry.

Benefits of Options Trading

  1. You can start Options trading with very small trading capital. All you need is an amount equal to the premium of an Option Contract.
  2. You can take both sides’ positions (buy-side and sell-side) with Options. For this, all you need to do is buy the call option and put option. This is not possible with Futures trading.
  3. In Options buying risk is less as only the premium paid amount is at risk and nothing more.
  4. Options, especially in index options and many top stocks are highly liquid. Thus, you can enter big positions at no slippage in prices.
  5. Trading in Options also provide you hedge for your futures trading. This is most common use of Options trading by big players in the market.

Futures vs Options Trading: Which is more profitable?

Though in reality, it depends on the trading strategy and execution, the data ( after talking to more than 45 profitable traders) suggests that Options trading is more profitable as compared to futures trading.

Ofcourse, the profitability here means return on amount of capital employed. Futures margins are quite high and then you have to keep extra trading capital in your account to take care of the stop loss too. Whereas, in Options trading, you can trade with smaller capital with nearly same risk management.

In Options trading, if you are into Options Selling, then you can even earn a consistent income from stock market.

How is Options trading more profitable?

The first and foremost reason is that amount of trading capital required for Options trading is lot less as compared to futures trading.

Frequently Asked Questions

Which is riskier – futures or options?

Options are to trade riskier than futures.

Which are more profitable futures or options?

On average, Options are more profitable as compared to futures.

Can Futures Trading make you rich?

There is no guarantee that futures trading will make you rich. However, it is possible to make a lot of money in futures trading.

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