Options Trading Vs. Futures Trading

Futures and options trading have many similarities.

Futures and options trading have many similarities.

Gambling money in casinos or at the stands has a bit of a seedy connotation, but investing money has a certain cachet that distinguishes it from gambling. In reality, depending on how you invest your money, it can be a solid form of creating wealth or patent speculation that could dissolve your entire savings. If you are interested in options or futures trading, know the difference between the two, and be one with the fact that they are speculative and very risky markets.


Options are rights to buy or sell a specified security at a specified price by a specified time. Traders can buy call options, which are the rights to buy, or put options, which are the rights to sell. These rights must be used, or "exercised," before the agreed upon date or they expire and become useless. Futures are contracts to buy or sell commodities at an agreed upon future date at a predetermined price.


Both options and futures are future-based speculative trading instruments traded on open markets. You can buy both call and put options, which are guarantees of set prices in the future, which is the same thing as negotiating futures prices for the rights to buy and sell commodities at a certain date. They are both considered "derivatives," as they are securities that are only derived from actual products. You are not trading anything real, you are trading rights, a theoretical concept. They both have a lot of inherent risk, since they are rarely based on anything other than speculation.


Options are the rights to buy or sell stocks, while futures are derived from the commodities markets. While options expire, futures never do and must be traded if you don't want to end up taking truckloads of pork bellies. Even if the options don't expire, you have no obligation to use them if your strategy has changed or if a better opportunity came up for your money, while futures contracts must be met. Options can be exercised at any time prior to their expiration date, while contracts are created with a specified date.


There are two main purposes for both options and futures. The first is purely speculative -- it's a means for investors to make money from a trading market. Most investors have no need for commodities, they are piggybacking on a market that benefits farmers and other businesspeople. The other, more essential purpose, is to hedge your bets. Since options and future prices are both locked in, investors can integrate their potential returns into an overall investment strategy. For example, If you don't know which way a market will go, you can invest in a gold mining company and hedge your bets by buying gold contracts, since these two markets often move in opposite directions.


About the Author

Jennifer Sable has been freelance writing since 2007. She has written copy for Pretty Me Maternity and frequently reports for 100 Ftse Index News in addition to other fashion and business websites. Mrs. Sable holds a finance degree from Yeshiva University and a Masters of Arts in public administration from New York University.

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