You’ve heard about commodity trading and want a piece of the pie. You’re new but eager to make great returns from trading commodities. You’re euphoric even. However – like every new commodity trader – you’re torn, confused, and uncertain: should I trade futures or options contract?
That’s the biggest investment question new traders waffle back and forth with. Futures vs options is a big issue that also affects experienced traders – never mind both options have pros and cons. To better understand what to focus on as a new trader, it’s best to know what makes each so different from the other.
Futures are the way to go
It’s easy to have your decisions influenced on the futures vs options matter. But even experienced traders who’ve been in the game for long admit futures are the best for commodity trading. They are more liquid than options. And their value never decays. Never depreciates over time.
For your peace of mind, go for them. They’re quicker than options, too. That’s because options draw a parallel move to futures. That means if futures are slower – which is unlikely in any commodity trading setting – so will options drag on. It’s a fact that options moves correlate to those of futures.
And because futures are quicker, it makes sense to trade in them any day. They make trading as easy and getting in and out. And the best part? You’ll experience little to no spillage. But the same cannot be said of options. If faced with a futures vs options decision know that futures are the way to go.
Futures vs options: Which between the two is ideal for you?
On the flip side, trading options is a risky affair. Because options value depreciates with each passing day. And it gets worse when they’re about to expire. As a new commodity trader keen to make good of their initial investment, options are a riskier bet. A wasting asset, in fact.
Imagine the frustrations. Just when you’re on the good side of trading options, they cease having value as time ticks away. Even sadder, you can’t do much as the market moves slowly to your eternal regret. It’s every trader’s nightmare. But also part of the painful learning curve.
Options are slower to move compared to futures. Some traders relish this aspect about options, and that’s okay because it’s easy to get locked out of a futures trade in a snap of a finger. One wild price swing and trading is done for.
But with options? It’s a safer bet. Risk is minimal as you can quickly go against the wild price swings that futures contract provides – making more money on options prices.
To put it another way, risk of losing money is drastically lowered if you trade on slower options than quicker futures – but only if the market moves fast enough to counteract time decay.