Deciding between stock options and futures contracts can be difficult. Both have their unique benefits and drawbacks that you need to take into account before making a decision. In this blog post, we will break down the differences between these two investment vehicles so that you can make an informed choice about which is right for you.
We discuss:
-What are stock options?
-What are futures contracts?
-The difference between stock options and futures
-How to choose which one is right for you
Real quick guys, please hit the like and subscribe buttons below as well as comment and let me know your thoughts on this video.
Also, be sure and grab the FREE Simplified Options Strategies Trading Guide. I’ll put a link down below. It covers the different options strategies setups, how and when to put them on, max profits, and trade management. It’s a great guide to have by your side when trading options.
So let’s get started!
What are stock options?
Stock options are a type of derivative security. This means that their value is derived from the underlying asset, in this case, stocks. Stock options give the holder the right to buy or sell shares of the underlying stock at a set price on or before a certain date.
There are Put options and Call options. A Call option is a contract that gives the holder the right to buy shares of the underlying stock. A Put option is a contract that gives the holder the right to sell shares of the underlying stock.
What are futures contracts?
Futures contracts are also a type of derivative security. Their value is derived from the underlying asset, which in this case is a commodity (such as oil), index, or currency (like the British pound).
With a futures contract, two parties agree to buy or sell an asset at a set price on a certain date in the future.
Futures contracts expire on a set date and must be settled before that date. They are settled by paying the cash difference between the contract price and the current market price. The actual underlying asset like a barrel of oil will not be delivered to your doorstep.
The difference between stock options and futures
The main difference between stock options and futures is the underlying asset that each security is derived from. Stock options are based on stocks, while futures contracts are based on commodities, indices, or currencies.
Another key difference is that stock options give the holder the right to buy or sell shares of the underlying stock, while with a futures contract, the two parties agree to buy or sell the underlying asset.
Futures contracts are liquid. It is easy to get in and out of the contracts without a lot of slippage. Slippage is the difference between the bid and the ask prices which is money that you give away every time you buy or sell.
Futures contracts are also tax-advantaged. What does this mean?
There are long-term and short-term capital gains for stocks and stock options. If you hold them for more than 1 year in your portfolio they are taxed at the long-term capital gains rate. Anything inside of 1 year is taxed at the short-term capital gains rate which is currently
Futures contacts are taxed as 60% Long Term Capital Gains and 40% Short term Capital Gains. This is a huge advantage that can add up over time depending on the size of your account.
Futures contracts also trade 23 hours per day 6 days per week. Only closed on Sundays.
The notional value of futures contracts are very large. This is great because they are highly leveraged and you can make a lot of money fast. You can also lose your whole account if you don’t know what you are doing. For this reason, most people will want to use stops or in other words trade spreads. This is highly recommended. I do it every time I trade futures contracts.
How to choose which one is right for you
The choice between stock options and futures contracts comes down to a few key factors. These include the type of asset you are interested in investing in, your investment goals, and your risk tolerance.
If you are interested in stocks and you want the flexibility to buy or sell shares at a set price, then stock options may be the right investment vehicle for you. However, if you are looking to invest in commodities like wheat, indices, or currencies such as the Euro, then futures contracts may be a better fit.
Deciding between stock options and futures contracts can be difficult. Both have their unique benefits and drawbacks that you need to take into account before making a decision. I think it is great to trade both options and futures. You gain more knowledge and become fully engaged in the markets.
I use the Tastyworks platform which allows you to trade both options and futures. It’s the best trading platform out there for this. I’ll put a link down below and you get their current special offer when you open an account.
Alright guys, please remember to hit the like and subscribe buttons below as well as leave a comment or question and let me know your thoughts on this video.
Also, be sure and grab the FREE Simplified Options Strategies Trading Guide. I’ll put a link down below. It covers the different options strategies setups, how and when to put them on, max profits, and trade management. It’s a great guide to have by your side when trading options.
See you in the next one!
Are you trading options or Futures?
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