Options vs. Futures: A Comparative Analysis

The world of investing is expansive, and following the advice of diversifying your portfolio naturally means that you're going to encounter new investment types that you need to become familiar with if you wish to put money into them. An excellent example of this is options and futures. But what exactly are options, what are futures, and how do the pair differ? In this guide, we'll take a closer look at the two to provide you with everything you need to know about each in order to invest in them with confidence.

What Are Options?

Most individuals at least slightly familiar with investing are familiar with investment vehicles like stocks, bonds, and even CDs. Options are very likely new territory for most. Aptly named, options are a type of derivative contract whose value is based on an underlying commodity, stock, or index future. Options contracts are a type of investment where an investor agrees to buy or sell whichever underlying instrument is involved at a specific price during the time period in which the contract is in effect. The catch? Options give you the opportunity to pull out of the contract if you discover that you would not profit, such as if you anticipated the price of a stock rising or falling during the contract period but made the wrong call.

Speaking to the different types, the labels associated with options often indicate whether you're a buyer or a seller. For example, a buyer will be involved in a call option while those who are selling the underlying commodity are involved in a put option. Similarly, a long option involves buying and a short option involves selling.

What Are Futures?

So, what are futures? Futures are very similar to options in that you have a futures contract where you're planning on buying or selling a commodity at a future date (and futures contracts are heavily focused on commodities like corn or oil). The difference between options and futures lies in the fact that you can pull out of an options contract when you feel as though the contract would no longer serve you, whereas you have an obligation to follow through on your intent to buy or sell with a futures contract. This presents investors with a much greater risk than they'd receive with an options contract.

Which One Is More Advantageous As an Investor?

Determining which investment vehicles are the best fit for you is extremely personal and will require you to assess all the advantages and disadvantages of each investment type to draw definitive conclusions. That being said, options are often the better of the two for those who are new to either. Whereas futures lock you into the contract and are subject to a 24-hour market that can be heavily impacted by developing news stories and changes in the underlying commodity's respective industries, options are much safer, giving you the ability to back out of your contract should you believe that you're not in a strong position to realize a profit as a buyer or a seller. Unless you have a specific reason to engage in futures contracts, options contracts may be a better fit for you.

Start Your Options Investment Journey With Leviathan

Are you interested in options contracts? If so, start your investing journey here with Leviathan. We make options contracts much easier to approach with our extensive educational database and support, best options trading courses, and options analysis software to help you take some of the pressure off of your shoulders and take advantage of what modern technology has to offer. Ready to begin? Explore our website today or reach out to us if you have any questions that we can help you with before you start exploring our options investing solutions.