Options and Futures trading are two financial instruments designed for investors to generate or protect their current assets. Both Futures and Options contracts enable an investor to purchase an investment at a set rate by a specific date. However, the marketplace for these two items operates substantially differently in terms of how they function and how risky they are to the investor. As a beginner, one should be aware of their risk tolerance before entering into any of these trading items.
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What are Futures and Options (F&O)?
Futures and Options trading are classified as derivative items as they derive their value from an underlying commodity or asset but they vary fundamentally. A Futures contract is a legal commitment between a purchaser and a supplier in which both the parties decide upon purchasing or selling a preset amount of shares or an index at a fixed asset in the future on an online trading platform.
On the other hand, Options trading grants the buyer or seller the right to purchase or sell the underlying asset at a predetermined price on or before a specific date. The difference here is that it is a choice and not an obligation. Options trading implies limited risk but also less profit returns. So, it depends on every individual trader’s risk tolerance.
Types Of Future And Options Trading
The Futures contract has the same terms for the seller and buyer of the contract. However, the options may be simply separated into two forms. (1) Call Option – A call option is an offer to purchase a stock at the strike price before the contract expires. (2) Put Option – A put option is a contract to sell a stock at a certain decided price.
Which is Best For Beginners – Future Trading Or Options Trading?
Looking from an investor’s perspective, Options trading could be complex, but at the same time, the only thing at risk is the cost of premium that was paid at the time of purchase. In the case of Futures contracts, a greater amount of risk is involved for traders since the price of the underlying asset may fluctuate more than expectation and you might have to pool in more money in the Futures to avoid any failure of commitment. So, while choosing between Futures and Options on an online trading platform, you must make the decision based on your risk appetite!
Take Away
One should be aware of their risk tolerance before getting into any of the trading items. Both Future and Options trading carry a high level of risk since accurate projection about price movement cannot be made. Having a complete understanding of the issuing company and the underlying assets is critical for better returns from derivative trading. You can make your trading experience a delightful one by choosing Options trading app, which shows all details at a single place and helps you make an informed decision.
