Disadvantages of trading in futures and options


Each contract has a different size and different price movement amounts. Traders also have to understand final trading dates and possible delivery options. Futures are also traded only with brokers that are registered with the Commodity Futures Trading Commission, and cannot be traded with regular stock brokers.

Many commodities have a daily limit on how much the price can change. If a commodity value is changing rapidly, it will quickly reach the limit price each day and traders will not be able to continue trading. A futures trader who is caught on the wrong side of a trade making limit moves every day may be stuck in the contract with few options to stop the losses. Futures contracts are for large amounts of the underlying commodity or instrument.

Options allow you to create unique strategies to take advantage of different characteristics of the market - like volatility and time decay. Options allow you to take a position with very low capital requirements. Many individual stock options don't have much volume at all. The fact that each optionable stock will have options trading at different strike prices and expirations means that the particular option you are trading will be very low volume unless it is one of the most popular stocks or stock indexes.

This lower liquidity won't matter much to a small trader that is trading just 10 contracts though. Options tend to have higher spreads because of the lack of liquidity. This means it will cost you more in indirect costs when doing an option trade because you will be giving up the spread when you trade.

Although most brokers won't charge any additional fees if you choose to use an auto trading service, you will still have to pay standard commissions on all your trades.

Because of this, you need to make sure that you use a provider that's suitable for your budget. Additionally, you need to consider the actual charges for using the service because, if you have relatively low investment capital, then any profits you make may not even cover those costs. The benefits of using an auto trading service are fairly straightforward, but they are dependent on using one that consistently performs well.

If you do manage to find a decent service, then the obvious advantage is that you can make money through the time, effort, and expertise of a third party. Even though you have to pay for this, if it makes you a significant profit over and above that cost then this it's clearly money well spent. The other main benefit is the fact that it removes the emotional aspect of options trading.

One of the biggest mistakes that investors tend to make is letting emotion take over their rational thinking, and this invariably leads to problems. It isn't always easy to control emotions when money is involved, and emotional responses can result in bad decisions like taking unnecessary risks or chasing losses. When your trading is done automatically there's no real emotion involved.

Despite some clear benefits, there are some significant disadvantages too. For one thing, it can also be very difficult to find a service that fits your personal circumstances and investment objectives. Most of them have a broad standardized approach to the transactions that they make, and those approaches don't necessarily take into account what the precise requirements of the customers are. Although it's possible to find a service that largely makes transactions that are suitable for you, the chances of finding a service that is perfect for your exact situation are fairly slim.

The fact is that you are totally reliant on a third party to invest your own money for you. There's no approval process in place which enables you to pick and choose which suggestions you follow and which you reject; if your provider highlights an opportunity then it will instruct your broker accordingly and the orders will be placed regardless of whether you like the opportunity or not.

Basically, you have absolutely no control of how your money is invested. Although this can work in your favor if your provider is consistently making you a profit. There's always the risk that they could make a string of bad decisions that lose you money, and you still have to pay them their fee.