Futures vs Options: Which One Is Better for Prop Trading?

If you are even slightly aware of the trading landscape, there is a high chance that you have come across both futures and options. In both futures and options, you speculate on price movements without owning the underlying asset, but still, they are very different in function. If you are looking for an answer to which is better, trading futures or options, there is no direct answer to it, as the choice mainly depends on your trading style, risk tolerance, and goals. 

In this blog, we’ll discuss what futures trading is and what options are, the advantages of each, their differences, and guidance on which one may be more suitable for you as a prop trader.Let’s say you’re a skilled trader. You’ve spent months refining your edge. You’ve survived the emotional rollercoaster of learning to control risk. You know how the markets move - tick by tick - and you’re finally ready to scale. But there's just one problem: your own capital is limited. That’s where a futures prop firm comes in.

Sounds simple enough, right?

But here’s what many traders don’t realize: picking the wrong prop firm is like joining a gym that charges you to fail. You’ll waste your time, drain your confidence, and possibly even start doubting your skills - not because you're a bad trader, but because you walked into the wrong room.

A futures prop firm should be a growth partner, not a hidden obstacle course. And if you don’t evaluate them correctly from the beginning, even the best strategy in the world won’t save you.

What is Futures Trading?

Futures are contracts in which the buyer agrees to sell or buy an asset in the future at a predetermined price. However, unlike a normal contract, you must fulfill the contract unless you are able to close your position prior to expiration. For example, let’s say you are trading crude oil futures. One contract is typically equal to 1,000 barrels of oil; when crude oil is trading at $70 per barrel, the full contract value is $70,000. 

You are not required to put up the full amount of the contract, but rather only a margin amount of, say $5,000 to execute the trade. This margin is similar to a security deposit. If the price of oil goes up to $75, your contract increases in value by $5,000 (1,000 barrels × $5) or a 100% return on your margin. On the contrary, if prices dropped to $65, you would incur about the same problem. You see that futures incorporate a huge upside but also a huge downside; reason screening is of utmost importance because clearly a futures position carries huge upside potential, but also substantial risk.

Advantages of Futures Trading?

1. Leverage: 

Futures contracts allow you to control a substantial portion of an asset for a relatively small deposit. Leverage allows you to maximize your potential profit from small price moves. For example, in S&P 500 E-mini futures, you could control $150,000 of the index by putting down only $7,500. Similarly, leverage could magnify your losses, so be careful either way.

2. High-Liquidity: 

Futures markets with large daily volumes, like crude oil futures and major indices, have the added benefit of high liquidity. Given your ability to buy and sell quickly, you won’t have to worry about a large gapped market move or finding a wide spread for your trade, which is key for prop traders that require the speed and precision.

3. Round-the-clock Trading: 

Futures markets work 24/5, giving traders more flexibility. Unlike stock market, where the markets close at the end of the business day, the futures markets remain open 24 hours a day.

4. Low Commissions and Costs: 

Because futures are standardized contracts traded on institutional exchanges, transaction fees and commissions are often less than, or comparable to, options or equities; lower costs equal more profits.

5. Good for Diversification: 

Futures make it fairly easy to diversify into other asset classes. Suppose you own oil stocks. By trading crude futures, you can hedge or protect (to an extent) your position if oil prices go down.

What is Options Trading?

Options are contracts that give you the right (not the obligation) to buy or sell the asset at a certain price before a certain date. There are two different types of options: calls (which give you the right to buy) and puts (which give you the right to sell). Let's say you buy a call option on the S&P index with a strike price of 4,500 that expires in a month. If the S&P index reaches the price of 4,500 before expiration, then that option increases in value, and you can either sell it for a profit or exercise it. If it does not exceed the price of 4,500 for expiration, your maximum loss will be the option premium you paid.

Advantages of Options Trading?

1. Potentian For High Returns: 

Options let you control a large position for a fraction of the cost of the underlying asset. If the market moves your way, returns on options can be huge. For example, a $2 premium call option on crude oil might double in value if oil moves up just a few dollars.

2. Profit Opportunities Due to High Volatility: 

Options are highly volatile and their volatile nature creates opportunities for traders to make profits. Whenever there is a major event, the prices of options fluctuate, creating chances of both high reward and risk.

3. Liquidity: 

Big contracts like S&P 500 or crude oil options have good liquidity, meaning you can trade easily without big spreads. You can enter or exit a trade without much worry.

4. Limited Downside Risk: 

When you buy options, your max loss is limited to the premium paid. This can be comforting compared to futures, where losses can exceed your margin.

5. Low Capital Requirements: 

Options let you enter the market with less capital upfront. Instead of putting up thousands in margin like futures, you just pay the premium, which might be a few hundred dollars or less.

Key Differences: Futures Trading Vs Options Trading

1. Deliverables: 

Futures contracts commit you to buy or sell the underlying asset at expiry unless you close out earlier. Options give you a choice: you can exercise the contract or let it expire.

2. Obligation to Buy or Sell: 

In the future, both parties must fulfill the contract terms. In options, the buyer has no obligation; the seller does, which can create risk for the option seller.

3. Usability: 

Futures are generally straightforward; your focus remains on price direction. Options allow for more complex strategies, including betting on volatility or generating profits through selling options.

4. Quantity of Deliverables: 

Futures contracts generally have a different contract size for different commodities or assets. For example, a futures contract for crude oil is usually 1,000 barrels, 5,000 bushels of corn, and more. On the other hand, options contracts have standardized sizes depending on the underlying asset.

5. Settlement: 

Futures are settled daily, however, there is no such rule in options. An options contract can remain open until the option expires.

Which is Better? Trading Futures or Options

Futures and options all offer unique value. Futures give you exposure and leverage, which is ideal for active traders who make decisions quickly and tend to venture into big moves. Options also have their advantages, like flexibility and limited risk, which are great for making calculated and deliberate moves.
As a prop trader, it is important that you have basic knowledge of both futures and options. Moreover, if you have not tried, it can be a good idea to try both and see which aligns better with your trading strategy and goals.

While both futures and options have their appeal, a futures prop firm can be especially attractive if you want to leverage high-liquidity markets using the firm’s capital.

If you're risk-conscious, you might lean toward a two-step prop firm evaluation, knowing there’s a second phase to confirm your performance wasn’t just a one-time fluke.

Conclusions:

Futures and options all offer unique value. Futures give you exposure and leverage, which is ideal for active traders who make decisions quickly and tend to venture into big moves. Options also have their advantages, like flexibility and limited risk, which are great for making calculated and deliberate moves.

As a prop trader, it is important that you have basic knowledge of both futures and options. Moreover, if you have not tried, it can be a good idea to try both and see which aligns better with your trading strategy and goals.

FAQs: Futures Trading vs Options Trading

1. Is it better to trade options or futures?

Both futures and options have their own advantages and disadvantages; you should choose the one that sits well with your trading strategy, objectives, and risk tolerance.

2. Can I trade futures on Hola Prime?

Yes, you can trade futures on Hola Prime Futures and get 90% rewards, 1-hour payouts, 1-step challenge, and more.

3. Which is the cheaper option or futures?

Comparatively, futures are cheaper as the trader needs to pay only a small upfront margin. On the other hand, premiums for options are usually higher, making it more expensive to trade.

4. Which is safer, futures or options?

In Futures trading, a trader is bound to execute the trade at a predetermined price at a predetermined future date. However, there is no such obligation in the options.

5. Futures or options: which is more profitable?

Futures contracts are more profitable because of the huge leverage available. Just like more risk, it also carries more potential for more profits.

Become an Hola Prime Trader

Start trading within minutes!

Disclaimer: All information provided on this site is for educational purposes only, related to trading in financial markets. It is not intended as financial advice, business or investment recommendation, or as an opportunity or recommendation to trade any investment instruments. Hola Prime only provides an educational environment to traders, including tools, materials and simulated trading platforms which have data feed provided by Liquidity Providers. The information on this site is not directed at residents in any country or jurisdiction where such distribution or use would be contrary to local laws or regulations.