Advantages of Options Over Futures

Options and futures are two popular asset classes for investment trading. They both offer significant leverage over the underlying asset and the ability to make large profits on a relatively small investment. Options provide some features and advantages that may make them more attractive to a trader.

Option buyers have their risk limited to the amount of the premium they pay for a contract. The cost of an option is usually a small percentage of the value of the underlying asset and if the option expires, the option trader loses only the amount the contract cost. Futures contracts can result in losses that exceed the original margin deposit or investment. If a futures trade goes in the wrong direction, the trader's losses will continue to mount until the trader can close out the position.

Holders of most option contracts have the right to exercise the contract at any time and buy the underlying security at the contract price. The ability to acquire the underlying asset is an advantage and gives the option trader more flexibility. Futures contracts are only settled when the contract expires and many futures settle for cash and do not deliver the underlying asset. The right to exercise an options contract at any time is a feature of options that have American-style settlement options, which includes most stock and ETF options. European-style option contracts only settle at expiration. Many options on indexes are European style.

Option contracts trade against a very wide range of securities including thousands of individual stocks, exchange traded funds, stock market indexes, and even most futures contracts. The recent growth of ETFs that mimic assets that were formerly only available for futures trading increases the numerical advantage of options. In contrast to options, futures contracts are traded on a much smaller range of assets.

Options trading authority can be added to an existing stock brokerage account--even IRA brokerage accounts. Options can be easily integrated into an overall stock market strategy or traded separately. Futures trading requires an account with a broker registered with the Commodities Futures Trading Commission (CFTC). Stock brokerage firms and futures brokers are often different businesses.