Trouble Choosing Between Futures and Options

G

gaussian

I'm generally an options trader. I have lots of books on options, and in general I enjoy trading options. However, I've recently spent more time in futures and I quite like them as well. Both are fun to me. So much fun in fact I have analysis paralysis and I need some external input. I can't do both well. Right now I'm a swing trader because I don't have enough money to do it full time. I also only have enough money to do one really well - I can't dabble in each.

Options

Pros
  • Many setups because of how many degrees of freedom a contract has
  • thousands of tradeable underlyings, can also trade on futures (though I don't do that)
  • Not favorable tax status unless trading indexes (SPX, RUT, etc)
Cons
  • Margin is actually margin
  • Time dependent
  • Often times margin is excessive on short positions
  • Stuck trading the US cycle (I'm in the US) and closing options trades can't be done after hours

Futures

Pros
  • Trading involves interesting things like commodities, financial futures, index futures, etc. There are always setups.
  • Favorable tax status
  • Margin is actually sort of escrow/payment-in-good-faith
  • 24 hour market (more or less)
Cons
  • Sometimes very large margin but intraday is usually tolerable.
  • 100% directional (for example, there's no short vega/long theta style trades).


I think each has their merits and both are in general pretty liquid. I can't decide which is better for me, the retail, though.

Can anyone help me resolve this dilemma?
 
I would highly recommend you learn both. If you plan to do this full time, there should be time to learn both. The reason being is there are many times where depending on market conditions, one is more favorable than the other. For example, you feel short but premium is to high, futures may be the better play. If you feel sideways then options will be better. etc

However, if you really want to decide on just 1 vehicle. This is what I would do

If your edge is based on being able to anticipate direction. Futures. As premium won't get in your way and intraday margin can reward you greatly.

If your edge is being able to find the best strategies for the current market condition, I feel options have more strategies. (but I would still add futures in my arsenal)

ps, I trade futures a lot more due to it being 23/5 so I am probably bias :D
 
Futures all the way

No time contraint other than rollover

The ability to trade or even get the F out nearly 24 hours a day

Better liquidity so once you find an edge you can press the $hit out of it without market makers trying to hinder you

Lower tax liability if in the United States

Easier tax returns

No PDT if you don't want to keep over 25k in the account

With the addition of the micro minis the index futures are much more watered down leverage wise if you want to start that route
 
I agree with parts of Times' and volente's posts.

• Yeah! Learn both! I have a scale, at one end of which is 100% index options, and the other is 100% index future contracts. Big trend? Small vol? Futures. Trend shake-outs? Volatility? Options.
• God bless Section 1256.
• "Iron" option positions let you double the use of margin capital, OR let you halve the (delta) risk. "Yay!"
• EOD trend trades (with a validated system) let you sleep at night. "Yay!"
• Trend/swing positions via option synthetics mean you're fighting theta, so you not only have to be correct on direction, but correct on *time*, too. You can address this by going out in time, or further ITM, or both. But now volatility comes into play: it helps in put-side positions (where vol↑ > time↓), but adds insult to injury for call-side positions (where vol↓ and time↓ both punch you in the nose.)
• Lastly, something we do less of in the U.S. in retail/semi-retail than in other countries: pairs trading. If you went long the S&P, but short the DJIA, as a single contract line+graph (easily writable in IB's TWS, maybe/maybe-not in others), your futures margin impact should offset as the day/market moves, while still giving you a workable market, *plus* both are 1256s.
 
Times said:
I would highly recommend you learn both. If you plan to do this full time, there should be time to learn both.
More...
You must be a professional or a lot smarter than I. As an amateur retail, I trade options full time since 2013 and am still a newbie trading single legs.

I don't think I will ever be able to learn everything about options since there are so many different combinations, types and strategies. For example I spent over two years studying butterflies and still cannot find a setup I like.

As an aside, I don't know how to trade futures but I thought both futures and options are derivatives of the underlying and are linked in some way.

Finally, I like options because of convexity.
 
Go ahead and learn both, after all knowledge is good.
For me I found I absolutely suck at picking direction so directional trading on anything is lost on me.
Option trading slows down the action and gives me the chance to adjust to being wrong on direction and still make money.
 
Hi one newbie options questions, I trade intraday ES. how do i go about hedging my risk, for ES, for short term trading ( RTH position open and position close when target is met or flat by end of RTH). I trade around 6-10 contracts and would like to limit the risk without involving stoploss. Is it viable to try and manage the risk with options. I am able to gauge the trend by end of first hour but sometimes the price does not go along as anticipated as it tends to go a bit lower than my entry , before taking off as anticipated, so would like to limit the risk and also certain occasions, it does go the opposite of what i anticipated or gets stuck in a range. So can options help me in dealing with the risk, thanks
 
tenny1886 said:
Hi one newbie options questions, I trade intraday ES. how do i go about hedging my risk, for ES, for short term trading ( RTH position open and position close when target is met or flat by end of RTH). I trade around 6-10 contracts and would like to limit the risk without involving stoploss. Is it viable to try and manage the risk with options. I am able to gauge the trend by end of first hour but sometimes the price does not go along as anticipated as it tends to go a bit lower than my entry , before taking off as anticipated, so would like to limit the risk and also certain occasions, it does go the opposite of what i anticipated or gets stuck in a range. So can options help me in dealing with the risk, thanks
More...

What you're looking for is position insurance.
Options are nothing more than insurance policies.
So, the answer to your question is, "Yeah -- they can do that."

Get familiar with the profit/loss diagrams, and then recreate your individual ES trades on them.
Now, recreate them with option positions, instead. "Ahhhh-HA!"
And there you go!
 
Trade futures and hedge with options, some brokers use to lower futures margins when you hedge, if position goes in your direction, exit the options.
 
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