Options or Futures?

Discussion in 'Trading' started by cml2949, Jan 22, 2006.

  1. cml2949


    Options trading or Futures trading?

    I'm not looking for explanation of what each is.. Only which is preferred by the trader?

  2. spreads and liquidity are much, much better with futures.

    Plus they trade almost 24 hours.

    Don't even consider options over futures.
  3. **************************************************
    Note, I didnt see the "I dont want an explanation" until after I posted.

    I'm leaving this info in case anyone else is interested.

    Options and futures are both tradeable contracts.

    The main difference is that a future MANDATES delivery or settlement versus an option where delivery or settlement is, well, optional.

    Both contracts have two main parties involved, A long and the short.

    In a futures contract, the long is agreeing to buy the underlying and the short is agreeing to deliver the underlying for cash at the time of contract expiration.

    Here is a simple ag futures example. Say today, a long and short agree to enter into an agreement for 1 contract of march corn at 205 cents per bushel.

    Assuming they do not offset their positions, the contract MANDATES that upon assignment, the short will deliver 5000 bushels of corn to the long. The long will take ownership of the corn and pay $10,250 to the short for the corn.

    The delivery MUST take place.

    With an options contract, delivery will ONLY take place if the long chooses it too.

    For example, say a long and short agree to an April '06 IBM 80 Call contract for $410.

    Anytime between now and when the contract expires in april, the long of the contract, may at his discretion exercise the option.

    Upon exercise, he must provide $8000 to the short, and the short must deliver 100 shares of IBM.

    If the long does not exercise prior to April expiration, the contract expires worthless and nothing further happens.

    As you can see, the main difference is a forced delivery on expiration(futures contract) versus optional delivery at the discretion of the long(american style options contract).

    As for "which is best for trading", that depends on your strategy and what you want to do.

    Options and futures have totally different payout structures, so "which is better" hinges on what you are trying to accomplish.

  4. cml2949


    Hey Jack,

    I do agree with you that Futures are more liquid.. But I enjoy the fact of many more ways to trade options compared with futures; strategy wise. . Thanks for the response..
  5. I trade options on futures for positions that I keep for several weeks, except for the occasional scalping with aggressive packs of out-of-the money options.