The Similarity of Option Trading to Futures Trading
After spending a lot of time explaining the difference between option trading and futures trading, beginners to derivatives trading, I think it's time to touch options trading and futures Similarities between transactions. Are options and futures trading really different? What are the similarities? Well, there are actually four main areas where options and futures are similar
First, options and futures are all derivatives. This means that they are contracts only, allowing you to trade their underlying assets at some specific price, thereby deriving their value from the price movements of their underlying assets. Options and futures are contracts that bind the underlying asset at a specific price. Without the underlying assets, options and futures do not have any value for their existence, which is why they are called "derivatives." Options and futures are all designed to facilitate the trading of their underlying assets.
Second, both options and futures are leveraged instruments. This means that option trading and futures trading allow you to control price changes on its more basic assets than your cash normally allows. For example, a futures contract with an initial margin requirement of 10% will allow you to control the amount of money that is ten times the underlying asset, rather than usually allowing you cash. A call request of $ 1.00 in a $ 20 stock has twenty times the leverage as it allows you to control the stock value of $ 20 with only $ 1. Leverage also means that you can make more profit from options and futures on the same asset of the same asset, rather than if you buy the underlying asset with the same amount of cash. Of course, leveraged cuts are two ways. You could also lose more than you if you just bought the underlying asset over options and futures trading.
Third, options and futures can be used to hedge. Hedging is one of the most important uses of derivatives. Futures and options can be used to hedge the price risk of some or all of the hedged asset even if the option is more diversified and precise as it allows the so-called triangular neutral hedge, which allows the full hedge position to remain profitable if the underlying Of the asset phase in any direction of the strong breakthrough. Hedging rights in options and futures are also critical to reducing downside pressure on the overall market during a market crisis as large funds and institutions can use options and / or futures to hedge their downside risks rather than selling their stocks in order Maintain their account value. By reducing the sales of these large funds, the overall downward pressure on the market part of the relief. This, of course, does not prevent the market from taking shape when the general retail market (the "Herd") begins to pour out of the market.
Fourth, both options and futures can be used for earnings in addition to the price of the stock itself changes in other ways. Futures spreads can be used to infer seasonal price differences between futures contract prices for different expiration months, and the spread can be structured to profit from time decay, irrespective of the manner in which the underlying asset is exercised. Yes, it is these option strategies and futures strategies that make derivatives trading so interesting and valuable to people in mathematical calculations and strategic know-how
So while options and futures are very different derivatives, very much Different rules and trading characteristics of them in the above areas are still very much the same, you can learn more about how to use options and futures to your advantage more comprehensive and savvy traders or investors