Derivatives, which derive their value from the performance of other assets, are often negatively associated with risk and lack of disclosure by the general public. These ideas arise from high-profile failures. Contrary to this prevailing sentiment, there are distinct benefits to using options and futures as part of your portfolio.
Identification
Options and futures are similar derivative products that allow investors to lock in a set price for an asset during a particular time frame. Call options grant rights to buy at a particular price level, and put options enable you to sell at an established price.
Risk Management
The ability to establish a price point into the future mitigates the risks of fluctuating asset values. Investors use futures and options to hedge against losses.
Liquidity
Futures and options trade upon organized exchanges such as the New York Mercantile Exchange or Chicago Board Options Exchange. Organized markets allow investors to buy and liquidate derivatives quickly.
Leverage
Options and futures carry the potential for big profits because of leverage. You can spend less money to purchase derivatives and benefit from fluctuations related to a particular asset without actually owning large amounts of that investment.
Choice
Options are bought with premium payments, and you have the choice to exercise them in accordance with favorable underlying asset values. Conversely, futures are legally binding contracts that must be executed.