Can options replace futures?
- Thread starter thecoder
- Start date
They are different enough that I wouldn't say either can effectively replace the other.
Index Futures are like "trading ETFs with leverage".
Index Futures are like "trading ETFs with leverage".
All products need an exchange where their current price is determined by trading. These make up the "underlyings".
And options as derivatives are trading on top these underlyings.
But since commodities like corn, wheat etc. are bound to their harvest time, then this could be realized
by having multiples of the same underlying, only differing in their "harvest time" (ie. equals to the expiration time of options, and each exp time can have much different IVs).
So, IMO futures markets can be converted to ordinary equity markets to have everything standardized and treated equal, be it commodities, stocks, indices, currencies, etc. etc.
Ie. it's possible to get rid of such special futures markets and instead do it on a normal equity market with options.
And options as derivatives are trading on top these underlyings.
But since commodities like corn, wheat etc. are bound to their harvest time, then this could be realized
by having multiples of the same underlying, only differing in their "harvest time" (ie. equals to the expiration time of options, and each exp time can have much different IVs).
So, IMO futures markets can be converted to ordinary equity markets to have everything standardized and treated equal, be it commodities, stocks, indices, currencies, etc. etc.
Ie. it's possible to get rid of such special futures markets and instead do it on a normal equity market with options.
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Companies use futures to reduce risk by locking in price so it's more stable for them. If you remove futures, they will just find some other way to transfer that price risk. That is for commodity futures.
Equity futures I could kind of see the reason for removing then though it's the same thing in effect, they are used for transfer of risk.
Equity futures I could kind of see the reason for removing then though it's the same thing in effect, they are used for transfer of risk.
But that's why options are primarily for. Ie. use options for that.
I assume you’re referring to equity options Futures have options also. I’m referring to equity options.
Futures and options both don’t pay a dividend - so in this regard, yes.
Futures also have no technical cost of carry - your broker is the sole determinant of your margin. Not true on synthetic futures using equity options, you have margin requirements on the naked side.
so until that changes, no.
Futures and options both don’t pay a dividend - so in this regard, yes.
Futures also have no technical cost of carry - your broker is the sole determinant of your margin. Not true on synthetic futures using equity options, you have margin requirements on the naked side.
so until that changes, no.
Because they need to take delivery of a product/commodity.
I know options very well, but not that much futures, just started studying futures.
But I already have the suspicion that futures are IMO useless products,
and can very well be replaced by normal options. Isn't it?
Options are unilateral contracts where only one side is required to perform, other than the receiver of rights paying a premium, of course.
Futures contracts are bilateral contracts that require both sides to perform. One side must deliver a specified quantity, quality(If applicable), delivery location(If applicable), and with other obligations that deal with both mundane and exceptional situations. The other side needs to accept the delivery as per the various contract terms and make payment.