Derivatives trading has really taken off in the past decade and has grown into a matured industry on its own. The two primary derivative instruments traded on almost all assets now are Options and Futures. Even though they are so popular now, they are still widely misunderstood. In fact, there are still plenty of people who think that Options and Futures are the same thing; Are you one of them?

Options are derivatives that give you the rights but not the obligation to buy or sell the underlying asset at a fixed price, known as a strike price. As there are many strike prices and expiration dates to choose from in options trading, it is a lot more versatile than futures trading in that options can have variable leverage due to the range of strike prices available. This means that in options trading, you can be as aggressive or conservative as you would like to be.

Futures are derivatives that enters you into a binding agreement to buy or sell the underlying asset at a fixed price. At the end of a future’s life, the underlying asset must change hands between the two parties. Futures are traded with a fixed level of leverage according to the fixed initial margin payable to enter into the contract. It is less versatile than options and have unlimited loss potential which makes it more dangerous.

So, what are the different kinds of options and futures available in the market?

Both options and futures are now available for a wide range of assets. There are stock options, stock futures, index options, index futures, forex options, forex futures, commodities options, commodities futures and even options on futures!

Basically there are two main kinds of options; Call Options and Put Options.

Call options give the holder the right but not the obligation to buy an asset at a fixed price. This means that if you buy call options, you profit when the price of the asset goes upwards.

Put options give the holder the right but not the obligation to sell an asset at a fixed price. This means that if you buy put options, you profit when the price of the asset goes downwards. There is no need to short the asset itself, no margin to pay and loss is limited to the amount of money you spent on the put options. This makes buying put options the preferred way of speculating on a drop in price on an asset than shorting the asset.

There are also many other kinds of lesser traded options known as Exotic Options.

Exotic options are options with many complex conditions and functions. One of the most popular exotic options are Binary Options which are now widely available on forex. Binary options pays a fixed payout when the price of the underlying goes above a fixed price (Binary Call Options) or when the price of the underlying drops below the fixed price (Binary Put Options) by expiration of the Binary Options. Binary options also have extremely short expiration. In fact, some Forex Binary Options have 15 minutes or 30 minutes lifespan.

Basically, there is only one kind of Futures contract on which you either become the short, committed to sell the underlying asset, or the long, committed to buying the underlying. When you become the short in a futures contract, you profit when the price of the underlying goes down because you have committed to selling the asset at a higher price. When you are the long in a futures contract, you profit when the price of the underlying goes up because you have committed to buying the asset at a lower price.

There is a lot more to learn about options and futures before you can actually trade in them and you really need to study into their characteristics and strategies more before attempting your first trade.

Jason Ng is the Founder and Chief Option Strategist of Masters ‘O’ Equity Asset Management and author of Optiontradingpedia.com and Futurestradingpedia.com. Learn more about Option Trading and Futures Trading.

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