At whatever point you buy an options you aren’t prescribed to set up any edge as you are purchasing the choice on a settled cost likewise called the premium. The premium can diminish over the life expectancy of the choice when the hidden cost for the item moves towards your position or remains level. In the event that the choice isn’t practiced before the termination date, you can lose the premium that was paid, plus the seller for the option can profit from the amount paid for the premium.
Futures: At the same time as the premium for futures options, can waste away over time the futures agreement will not. It is possible to consider the margin on the futures agreement as earnest money which will cause you to responsible for the entire amount on the futures agreement.
Difference between Options and Future’s
1:Premium vs. margin
Options: When you buy an option you are not required to put up any margin because you are purchasing the option at a fixed price, which is also referred to as the premium. This premium can decline over the life of the option if the underlying commodity price moves against your position or remains flat. If the option isn’t exercised before expiration you will lose the premium you paid and the seller of the option will profit the amount of the premium paid.
Futures: While the premium for a futures option will waste away with time the futures contract will not. You can think of the margin on a futures contract as earnest money that will make you liable for the full amount of the futures contract. This is very risky if an offsetting position is not opened to help protect you against a negative price move.
Options: As options purchaser you are only limited to the amount of the premium that you paid for the option therefore your risk is considered to be limited.
Futures: Regardless of whether you purchase a futures contract or you sell a futures contract you are liable for more than just the initial margin you were required to put up to make the trade. This makes this type of trade risk unlimited.
One last notable difference between futures and options trading is the expiration date of each particular contract. If you were going to exercise an option to control the underlying futures contract you should know that this has to be delivered approximately one month before the underlying futures is set to be delivered. This is for physical delivery of the commodity and doesn’t hold true for the indices, which are not physical commodities and allows the expiration dates to be the same as the delivery dates.
As you can see there are several fundamental differences between futures and options trading with regards to technical aspects of each contract. Trading these instruments is a whole other matter in terms of trading platforms and specialized risk management techniques. Use this article as a basic primer for further studies on futures trading and see if futures and options trading are right for you.
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