Stock markets are usually considered a tricky and difficult place. Choosing which stock market positions to trade may be even more challenging since there is no single right or wrong way to go about it. Thankfully, all the different assessment methods fall into two categories: futures trading and options trading. Which strategy you choose between the two ultimately relies on the kind of trading you wish to perform and your long-term objectives.
A point to note here is the similarities between these strategies. Both have virtually limitless potential for financial gain and are well-liked by retail traders. More significantly, the two are derivatives, which means their prices are based on the value of another asset. Given the stark differences between the two instruments’ operating principles and market structures, there will be many situations when it makes sense to trade one over the other. And to choose one, it is essential to understand each strategy.
Futures Trading: What Is It?
Futures are agreements between two parties—a buyer and a seller—to exchange an asset at a predetermined price on a set date. Some contracts are resolved monetarily rather than physically.
The delivery of the underlying asset is not a requirement of these futures trading contracts. Instead, they adhere to the same guidelines for daily pricing as physically settled futures. All futures contracts are cash-settled daily, which means that after each trading day, the gains and losses of a futures exchange are allocated to the trader’s accounts.
Here’s what you can trade with a futures contract:
- Treasury bonds
Options Trading: What Is It?
Options are agreements granting a buyer or seller of stock the right to do so at a specific price later at a set date. When you purchase an option, you have the opportunity but not the obligation to trade the underlying asset. You are exercising choice if you choose to do so. As a result, you put less money at risk and have a better chance of profiting.
Trading Strategies for Beginners
1. Long Call
The long call is a simple trading strategy wherein you buy a call option. If there is an increase in the price of shares, you may exercise the option and purchase the shares at the strike price. If the prices go down, you can choose not to exercise the options. As a result, you will only lose the premium amount here.
2. Short Put
Here, you short the put option. You sell the put option, and as a result, the buyer can rightfully sell the shares at the strike price. You predict a rise in the prices of shares in the future. Thus, the one holding the options will not exercise the option. The reward for a short put is the premium you receive for selling. However, be cautious because you may incur unlimited losses if the prices fall.
3. Long Straddle
The long straddle strategy minimizes the risks and allows you to make uncapped profits. Here, you purchase a call option and a put option. Both have to be bought at the same strike price of the same expiry date and for the same asset. This is to leverage the market volatility. You may exercise the call option if the prices increase and the put option if they fall.
4. Long Put
Long put is another simple strategy wherein you hold the put option. You may use this if you expect a fall in the price. You can exercise your put option, selling the shares at the strike price as the prices drop.
The above mentioned strategies are only a few of the many strategies you can apply for futures and options trading. They depend on several determining factors, like the condition of the market, risk appetite, your futures and options, and more. However, do so with caution. The key is to understand the market trends and the strategy in-depth to avoid incurring huge losses.