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I am puzzled as to why options seem to be more popular than futures among retail investors. Brokerage firms seem to emphasize their options offerings more than their futures offerings. On Robinhood, options trading is extremely popular, while futures trading is not available at all. Even on this Stack Exchange site, you can observe that there is far more interest in options than in futures.

I am puzzled because:

  • Futures pricing is simpler than options pricing. Understanding option prices requires greater mathematical sophistication than understanding futures pricing. In my derivatives textbook, for example, practically the entire book deals with options pricing, while futures pricing only takes up one chapter at most.
  • Futures are very liquid, with surprisingly small bid-ask spreads. The same cannot be said of options, where there is often low liquidity and large bid-ask spreads on OTM options.

As a retail investor, I am happy with simple and liquid financial products, but most other investors seem to prefer a complex instrument (options) over a simpler instrument (futures). Why is that?

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These are just two products and not really an 'either-or' comparison; a little bit of apples and oranges. Still, there is some merit in looking at each product in the terms you've raised.

Options [These securities give one person the 'option' to buy or sell an underlying security at a specific price, for a specific period of time. If I buy an AAPL call option priced at $125 expiring Oct 31 2020, then I have 5 weeks to decide whether to exercise my right to buy a share of AAPL for $125, which I would only do if the share price in the market exceeded $125]

  • Purchased options can be easily used to mitigate risk, because your downside is fixed to the initial purchase price. At the same time, upside may be 'unlimited', so you know what potential loss you are looking at, but can still reap significant rewards from price changes.

    [note: this thinking is dangerously close to gambling, not that all options are gambling, but I personally think someone susceptible to high-risk trading/gambling may trick themselves into thinking a call option is a 'sure thing' and continually lose money on purchase fees. This may particularly true for far 'out of the money' options, like say a $150 AAPL call option that expires in a few months that might cost only pennies, but theoretically there could be a long shot that price rises to, say, $155 making you $5 for just a few pennies, which would be a 10,000%+ return. You will often see options like this being touted on the near-notorious subreddit 'wallstreetbets', where naive amateur "investors" speculate on high risk investments]

  • Calculation of pricing is not required to trade While the pricing of those options may be complex, if you assume at the outset that pricing for a particular market is reasonably efficient, then whatever price you see is 'fair', and you are therefore simply making a call [pun] on what direction you believe share price will go. This might mean someone can overpay for an option, but that is a risk with any uninformed trader getting in over their head. In some ways, because potential loss is defined, that risk is actually smaller with options. You see the wide price spreads on options as a sign that pricing may be incorrect, but it is not that simple, because there is asymmetric risk involved given one party takes upside potential for a fixed cost, and one party takes only downside risk for a fixed initial benefit.

  • Further, combined options strategies can help to narrow in further on the risk/reward you are taking on, by zeroing in on when you would gain or lose money with that strategy. I assume much of the volume of information you are seeing on options is just building up step by step on the combined strategies that you might want to use. But using 'vanilla options' and just buying, say, a call option on a share that you expect will be volatile, doesn't require you to use those more advanced combinations at all.

Futures [These are derivatives of the commodities market, and effectively commit you to buy or sell an underlying commodity for a specific price at a specific point in time. If I buy a futures contract to purchase a barrel of oil for $100 in December 2021, then exactly 13 months from now, if I still hold the contract, I will owe the counterparty $100, and they owe me a barrel of oil. Some futures contracts require physical exchange of the actual underlying commodity, which investors avoid by selling their contracts for the value of the commodity at that time, before maturity to someone who actually does want the physical delivery.]

  • Futures are more like 'regular equities' in that the investor holds both upside risk and downside risk. Potential loss can thus be larger.

  • Use of margin accounts: Because you don't actually 'buy' anything initially, money doesn't change hands - you are basically making a bet on a future outcome, and your bet has theoretically no impact on the underlying price you are looking at. So no need to actually pay money to your broker, but if your 'bet' starts to look losing, you will need to fork money over to your broker, and they don't want to take on any risk that you won't pay, so you'll need to set up a margin account that defines what happens when your futures 'bets' start losing. This will likely be why you can't trade futures with Robinhood. [Partly because the margin accounts are part of the setup of a futures contract, use of leverage is more common, which itself can increase risk].

  • In some cases, futures trading could require you to theoretically take physical possession of some assets, and therefore an inexperienced trader may not want to get into the area [though not all futures contracts have this implication, and you can usually sell before physical delivery occurs — see an interesting case on where this was a big problem for oil futures — How negative oil prices revealed the dangers of futures trading].

I would kindly suggest that if you think futures are 'simpler' than options, you may want to do more research before you start trading either. The two products are quite different from each other, and that difference should be something very definable if you really understand either one.

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In the US, options (other than options on futures) are securities (like stocks), are regulated by the Securities and Exchange Commission (SEC), and can be traded in a normal brokerage account. Futures (even those on financial indexes) are commodities, are regulated by the Commodity Futures Trading Commission (CFTC), and require an account authorized for commodities trading.

While some options strategies are high-risk, many popular ones like long options, covered calls, and spreads have limited risk -- and investors can easily get approval for these (often without even needing a margin account). On the other hand, futures are typically traded with high leverage and do not have any inherent risk limiter. Even with a stop-loss, a large gap up or down can not only wipe out your capital but put you in debt. Margin requirements for futures are designed to make this unlikely, but it's still possible.

Thus, while futures have attractive features of simplicity and liquidity, they also have a barrier to entry for retail investors.

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  • The first paragraph needs some work. There are equity futures that are regulated by the SEC, and commodity options (really options on futures) that are regulated by the CFTC. Since Robinhood is mentioned I'm guessing that they are comparing equity options and equity futures. – D Stanley Sep 22 at 12:53
  • How can you trade spreads without a margin account? – Hart CO Sep 22 at 17:04
  • @Hart CO - Most brokers require a margin account for selling short options. However, some will allow cash secured short puts and spreads where exercise style is European and long leg expires simultaneously or after short leg. – Bob Baerker Sep 22 at 17:44
  • @BobBaerker Do you happen to know of any such brokerages in US/CAN? I realize the question is not country-tagged, but I've not come across any that allow spreads in a cash-account, not counting simulating a spread with cash/shares covering the short. – Hart CO Sep 22 at 17:57
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    Interactive Brokers, subject to the limitations that I mentioned. – Bob Baerker Sep 22 at 18:02
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The choice of investment in Options or Futures is one of purely risk appetite. Fundamentally, an investor with Options can ONLY lose the amount of money of the Option purchase. This means an Option purchased say for $1.00 in the worst case can go to $0. Options lose value over time as the end date is reached, so typical options trades are only open for a short periods. Installment Options (or warrants) typically have a very long period, i.e. years, as opposed to months. (Warrants are simply Options with a market maker, so much easier to get in and out quickly).

Futures on the other hand are so highly leveraged being a derivative investment, that it is possible to invest $1.00 and possible receive a bill for $1,000. Futures Contracts always specify a margin to protect the investor from the broker immediately closing out a position due to lack of funds.

With a Futures investment, it is typically hard to sleep at night.

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  • Are installment options available to retail investors? Could you give a real-life example of a publicly-traded installment option? – Flux Sep 23 at 14:54
  • "Warrants are simply Options with a market maker..." Don't options exchanges have market makers too? – Flux Sep 23 at 14:56

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