Futures-Trading or Options?

What is the difference between Futures-Trading and an Option?

In Futures Trading, let’s take for example that gold is currently priced at $850 a troy ounce, we may decide that gold’s price will be rising. In this case, we buy a NYMEX gold Futures Contract (not Option) which consists of 100 troy ounces, this contract value will be $85000 (100 ounces x $850 an ounce), you will be required to place approximately 5.5% of the total $85000 as margin ($4675) trading deposit.

Leverage is a double edged weapon.

In this example of Futures trading if the price of gold goes against you or drops, you will be fully liable for all losses, and you will be required to top up your account to meet any margin requirements.

In other words your loss could be unlimited and go beyond your account outlay!

Is futures trading suitable for you?
As a general rule, only sophisticated investors that carry out their research and have a fundamental understanding of the commodities markets should consider futures.

High levels of volatility and the potential for significant losses makes these securities suitable only for those with long-term investment time horizons and a high level of risk tolerance.

Investors who are put on edge by emotion or who fear losses should avoid futures.

In conclusion we may decide that Futures trading is far too risky for us, we must not and do not want to be liable for unlimited losses if the price went against us.

Therefore we have a choice to play safe and instead purchase an Option.

This is why Options are important. Options provide an investment opportunity that is almost “too good to be true” The advantages are very real:

First, no margin is required.

With Options purchase, the profit potential is unlimited, unlike futures-trading; our risk is strictly limited to only the amount we pay for the option (Premium).

Options provide one of the greatest amount of leverage of any investment tool in the world.

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