Futures vs Options Trading: Which is More Profitable?

By Trader Pit

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 in 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.

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 consideration (premium), and the seller is obliged to keep his promise.

Benefits of a futures contract

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 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 of 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 loco price plus the cost of carry.

Frequently Asked Questions

Which is riskier – futures or options?

Options are riskier than futures.

Which is more profitable futures or options?

Options.

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.

About the author

Trader Pit

A yogi who like Finance and Technology. I have been in Indian Stock market for over 12 years now as financial analyst, portfolio manager, trader. Now, I focus on Yoga, Financial Education & Long term investing. 

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