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Using Options to Profit from Time Decay

by | Futures 101

Stocks, forex pairs, cryptocurrencies, and futures contracts provide active traders countless opportunities. Given the diversity of alternatives, one question rises above the rest: Which market should I trade?

Let’s take a look at two of the most popular assets out there—stocks and futures—and the reasons for trading each.

Why trade futures?

A futures contract is a financial derivative product that offers traders a collection of unique benefits. Whether you’re interested in listings on the Chicago Mercantile Exchange (CME) or the Chicago Board Options Exchange (CBOE), rest assured that a suitable contract is readily available.

So, why trade futures? Here are four advantages exclusive to these exciting products:

  • Capital Efficiency: Vastly reduced margin requirements give traders the ability to control positions in the market far in excess of dedicated risk capital.
  • Extended Trading Hours: The futures markets are open for electronic trading 23 hours per day, six days per week.
  • Multiple Asset Classes: Contracts facing metals, energies, currencies, bonds, and equities indices are all publicly tradable.
  • Volatility: A futures contract is designed to reflect the price of an underlying asset at some forthcoming point in time. Accordingly, volatility stemming from current events, traditional market drivers, and public sentiment is consistently present.

For active traders, the futures markets are target-rich environments. The combination of volatility, leverage, and a 23-hour trading day gives participants the ability to apply many different strategies. When approached with proper risk management, the answer to “why trade futures?” is simple: to make money!

Why trade stocks?

Since the dawn of the 20th century, many traders have sought fortune on the New York Stock Exchange (NYSE). Now, any aspiring stock market baron can trade the two premier equities exchanges on the planet, the NYSE and NASDAQ, from the comfort of their own home.

Like futures, stocks also offer traders several exclusive benefits:

  • Investment: Stocks have no expiration or rollover date. As long as the company in question remains solvent, shares may be held into perpetuity. This makes equities ideal for buy-and-hold investment strategies.
  • Portfolio Management: The NYSE (2,800) and NASDAQ (3,300) have hundreds of tradable stocks. From a diversification perspective, there are infinite ways to manage risk and tailor a stock portfolio’s sectoral exposure.
  • Ease of Entry: The rise of zero-commission brokerage services has vastly lowered the barriers of entry into the equities markets. Now, traders can open an account free of minimums, deposit and withdraw funds via ACH transfer, and buy and sell stocks remotely.

If you’re looking to grow capital over a long period of time, then stocks are a great way to do so. With no expiration dates, thousands of options, and low barriers of entry, equities are powerful investment vehicles.

What are the advantages of trading stocks vs. futures?

Still stuck on the why trade futures/why trade stocks quandary? Perhaps this table can help get you organized:
Futures
  • Low margin requirements
  • 23/6 trading week
  • Diverse asset classes
  • Optimal liquidity
  • Direct market exposure
  • Consistent volatility
  • Volatility can be extreme
  • Increased leverage may lead to
    significant capital loss
  • Account funding isn’t instant
    (wire transfers, check deposit)
Stocks
  • Thousands of listed companies to trade
  • Zero-commission brokerage options
  • ACH account funding
  • No expiration date or rollover
  • Limited liquidity
  • Extended trade durations
  • Higher required margins
  • Volatility can be moderate

Ultimately, the question of why trade futures versus stocks boils down to suitability. If you’re looking for capital efficiency, constant volatility, and a variety of asset classes, then futures may be for you. If you want to execute buy-and-hold strategies over time, then stocks may be the way to go.

Ready to get started with futures?

To learn more about how to get up and running in the futures markets, check out our free e-book, Basic Training for Futures Traders. In it, you’ll find expert tips on how to become a disciplined trader, set useful goals, and how futures contracts actually work. Download your free copy today!

This blog was originally published July 20, 2011 and has been updated for accuracy and comprehensiveness.

Download Basic Training For Futures Traders Ebook

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

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