In the past 18 months, an increase in ‘retail traders’ has sparked a transformation in markets worldwide. A combination of easier entry points and a release from lockdown boredom means so-called amateur investors are now operating alongside more experienced traders. While this means more potential for volatility in various markets, it also means more competition. That’s why futures and options are now being seen as an increasingly attractive investment choice.
An introduction to Futures and Options
Like any investment decision, the first – and arguably most important – step is to understand what futures or options are. Both now firmly established in trading circles, these two methods are popular with investors who don’t wish to own an underlying asset. It’s essential, however, to also understand the differences between futures and options before taking up a position.
For as long as an options contract is open, a trader can buy or sell shares at a specific price at any time. But there is no requirement for the trader to so – and they can choose not to if they prefer. An options contract is based on the value of an underlying asset too – whether that’s a commodity or stock. And it’s movement in those markets that will affect the options value.
With a futures contract, however, an investor will be obliged to buy or sell an underlying asset for price agreed upon up front. As Tickmill CEO Duncan Anderson says, “It’s simply a contract which allows an investor to buy or sell an asset like a stock index, a currency or a commodity like oil and it gets settled at some point in the future.”
What makes them such attractive investments?
For investors, there are some potential benefits that are common to both futures and options – despite their differences. In the first instance, traders can access markets they perhaps won’t ordinarily be able to. And it makes it even easier to diversify portfolios and hedge investments away from conventional markets such as stock indices.
High leverage and liquidity are also common attributes of both futures and options contracts. To start, investors won’t need a sizeable sum to gain exposure to the market(s). It’s possible for investors to execute trades quickly and easily too. As such, here are two trading methods that are growing in popularity and generating attractive returns for those open to the risks.
How should investors trade futures and options
If you decide that futures and options contracts are the ideal course of action for your latest investment move, you’ll likely want to know the best way to go about it. For some investors, trading via Contracts for Difference (CFD) can be the most effective – particularly as you can do so with ease on platforms such as MT4 that you can download and access on the move.
Using CFDs means that your chosen broker acts as the seller, rather than going direct to the holder of that asset. One benefit of doing this is that you can take your position based on an increase or decrease in value of the underlying asset – and there’s no expiry on the contract. So, CFDs potentially offer an even easier entry point into the market if that’s what you want.
