Advantages of trading futures vs options

Trading Doesn’t Have To Be Complicated

Most veteran traders consider futures to be a straightforward and transparent trading experience. To start, there are only two trading options—buy and sell—allowing you to go long or short as needed. In addition, with clear prices and limit order discovery, futures provide a level playing field for all traders. 

In contrast, stock options add several layers of complexity for a trader, starting with pricing based on the proximity of the contract to the current asset price, days to expiration, volatility, and interest rates. Let’s look at some of the advantages futures offer.


Benefits of trading futures vs. stock options

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Straightforward contract pricing

Due to complications around the pricing calculations for stock and index options trading, specialized tools are often needed to understand how an option position will react to price movement and volatility. Futures pricing and trading are much more straightforward, as you are only trading pure price action. Although futures markets can move quickly, this can create potential opportunities and benefits for futures traders.

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Virtual 24-Hour trading

When a news story breaks and moves a market, there’s often an associated trading opportunity. If you’re limited to trading stock or index options, the stock market may be closed when the opportunity strikes, making you unable to react until the next trading session. When trading futures, you can often place a trade in key markets the moment an opportunity arrives. Futures trading offers virtually 24-hour trading, except weekends, with good liquidity in many markets, so you can trade when the time is right.

Scales

Leverage

Both futures and stock options offer traders the ability to use increased leverage, meaning you can control a larger position with less money. The big difference here is that long call and put options are depreciating assets that can be worth zero at expiration. Traders should always be aware of the risks associated with trading on leverage and should only trade with appropriate risk management strategies in place. Leverage allows for potentially greater profits, but with greater opportunity comes increased risk and the potential for large losses.

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Higher liquidity

With tens of thousands of unique stock and index options contracts available to trade daily, it’s not surprising that a lack of liquidity can be a challenge for options traders. Low liquidity can lead to higher costs due to increased bid/ask spreads while also making it more difficult to exit a position. Futures markets are recognized as having generally higher liquidity—especially in key markets such as the E-mini S&P 500—keeping bid/ask spreads tight and making it easier to enter and exit a position.

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Lower capital requirements for day trading

Futures trading generally has a lower initial account opening capital requirement, making it easier to enter the market and day trade. When day trading stock options, regulations require a trader to maintain a minimum account balance of $25,000, which can be a high bar for new traders. Futures do not have this same day  trading capital requirement, and you can actively day trade using Micro futures contracts with as little as a few hundred dollars in your account.

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Diversification

The futures markets provide direct access to trade a variety of products and contracts—both financial and commodities—that are not available through stock options trading. This means that futures can offer greater diversification, which can help offset the risk of having all your eggs in one directional basket.

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