"Which is less risky, options trading or futures trading?"

"I want to know which is less risky: option trading or futures trading? Is options riskier than futures or is futures riskier than options?"

- Asked By Apurva Tewari on 18 March 2009



Answered by Mr. OppiE

Hi Apurva Tewari,

First of all, both options and futures are derivatives and leverage instruments and are therefore inherently riskier than simply trading stocks itself (although when used properly, options trading can be safer than stock trading). Also, both options trading and futures trading can be equally risky if your ability to produce fairly accurate analysis and outlook of their underlying asset is no good.

Now, comparing options trading and futures trading, I would say that for beginners, Options Trading is less risky than Futures Trading for a number of reasons.

Firstly, bigger rewards comes with bigger risks. Futures trading is capable of producing return on investment and leverage far greater than can be attained in options trading (which is why a lot of struggling companies pump all their money into futures as a last ditch effort to recover their losses overnight). In fact, Futures are a lot more sensitive to small moves on the underlying stock than options are on the same factor of leverage and capital commitment and are therefore a lot more volatile. Now, as we all know, leverage works boths ways. If an instrument is capable of profiting quickly, then it is also capable of losing money quickly. In this sense, even though futures trading makes money very quickly, it can also lose money faster than you can in options trading.



Secondly, when you buy call options or put options, your maximum risk is limited only to the amount of money you used when buying those options. The worst that can happen is that your prediction is totally wrong and the options simply expire worthless. You don't lose more money than that. However, in futures trading, you are subjected to unlimited liability and will be expected to "top up" your daily losses by the end of each day in what is known as a margin call. This daily loss continues as long as the stock continues to go in the wrong direction. Your maximum loss is limited to the stock going bankrupt or you going bankrupt. In that sense, for beginners who cannot make consistently accurate predictions (not even professionals can do that), options trading can help you preserve your capital by using only money you can afford to lose in each position. You won't get wiped out overnight just because the underlying stock ditched the next day.

Thirdly, because we are all not geniuses, the stocks we pick rarely go in the direction of our prediction right the very moment we put on a position, right? Usually the stocks we buy goes down a little bit more before going up, right? In futures trading, if that initial few days of drop is serious enough, you would be forced by margin call to top up your losses and if you don't have the money to do so, the position is liquidated and you end up owing money to your broker even if the stock does go up after a few days more. However, if you bought call options, you lose nothing even if the stock drops for a few days before rising! Yes, there is no topping up of daily losses at all, which means that you would have far greater holding power in options trading than you have in futures trading. The longer you can hold your position, the more time the stock has to go in the direction of your prediction, right?

Fourthly, again, because we are not geniuses, sometimes we want to bet on the stock going in more than 1 direction in order to increase our chances of winning, right? There are literally hundreds of options strategies you can use to profit from as many as all 3 directions simultaneously! Such versatility is lacking in futures trading of course. In futures trading, it usually is a single directional bet unless you use some arbitrage strategies which also exist in options trading anyways.

Fifth, once again, because we are not geniuses, we sometimes change our minds about the direction of a stock a few days after putting on the position, right? In futures trading, you would have incurred the daily losses and then have to close out the entire position but in options trading, you can simply add more options to the existing position and be able to totally change its directional bias! For example, if you bought call options on a stock and for a few days, it went down and you are now of the opinion that it may go up or down drastically from that point onwards. You could simply buy enough put options in order to totally neutralize the delta value of the call options and transform the position into a delta neutral position which is capable of profiting from either a topside or downside breakout! Again, such versatility cannot be found in futures trading.

Now, you can also lose ALL your money in options trading if you bought options with all your money and then the stock goes in the other direction enough to make those options expire out of the money. However, all you will lose is ALL your money. You won't end up in debt like you will if you put all your money into a futures contract and then have no more money to fulfill your margin calls. In this sense, options trading is definitely less risky than futures trading.


In conclusion, both options and futures are designed to be hedging tools, not speculative tools and futures trading has been extremely valuable in the area of commodities hedging where farmers secure the price of their produce early through buying futures contracts hence hedging against the risk of a drop in price. When used speculatively, futures are capable of producing a fortune overnight but it is also capable of wiping out a fortune and put you in debt overnight. As such, it is definitely riskier than simply buying stock options. Read our full tutorial on the Differences Between Futures and Stock Options.