- Futures Contracts vs. Options—Which Are Better?
- ETF Options vs. Index Options: What's the Difference?
For example, let’s say you had $6,555 to invest and you wished to invest it in Company X stock, currently trading at $75, which you expected to rise in value. If you chose to simply buy those stocks using your $6,555, then you could purchase 55 shares. If the stock did rise to, say, $75 then you would make a profit of $5 per share for a total of $755. This represents a 75% return on your original investment.
Futures Contracts vs. Options—Which Are Better?
The wide range of different options contracts that you can trade and the different orders you can place make it much easier to limit risk than it is when simply buying and selling stocks. As you learn more about options and the way they are traded, you will realize just how powerful a tool they can be when it comes to managing risk.
ETF Options vs. Index Options: What's the Difference?
Options enable the trader to effectively trade futures but without the potentially unlimited risk normally associated with futures contracts. Due to the rapid change in the supply and demand equation of the underlying asset, there is a potential rapid price movement in a future contract.
The reason for this difference is that index options are 89 European 89 style options and settle in cash, while options on ETFs are 89 American 89 style options and are settled in shares of the underlying security.
If the idea of knowing the exact amount of money you’re going to lose if the trade goes against you is something very appealing to you than you may choose to trade Put and Call options.
For example, you may have a particular skill for predicting changes in the forex (foreign exchange) market as well as a solid fundamental knowledge of a specific industry. You could use your skill in the forex market to trade options based on foreign currencies and also use your industry knowledge to trade options based on relevant stocks. The potential for finding suitable trades is almost limitless.
Please comment below if you have any questions about the difference between a future and an option !
The risk associated with stocks are straightforward: The price could plummet to zero and you’d lose your entire investment. Because the performance of individual stocks can be volatile day to day, experts generally recommend investing in stocks with money you won’t need for at least five years. To further reduce risk, don’t pile all your money into a single stock.
Both futures and options are derivative instruments, which means there is a substantial risk of loss when trading these financial instruments.
Anna-Louise Jackson is a former investing and retirement writer for NerdWallet. Her work has been featured by Bloomberg, CNBC, The Associated Press and more. Read more
This is a somewhat simplified example, but it does illustrate how you can generate sizable returns from whatever starting capital you have available. This is a clear advantage that trading options has over trading virtually any other kind of financial instrument. Quite simply, you can save money when taking a particular position on the relevant underlying security which enables you to make very cost efficient investments and trades. There are even a number of strategies that can be used specifically to reduce the cost of taking certain positions.