Option Trading As Hedging With Future by calloptionputoption.com

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Option Trading As Hedging With Future

Future trading is mainly used for hedging and speculation. Mostly traders choose future trading due to its hedging property. It is the true purpose of future trading. Many managers use hedging of future trading but there is a main problem that the settlement price is not the actual spot price of the underlying asset which causes large differences. In simple words, using future trading with hedging has a drawback that it does not give us the actual price rather it shows the settlement price and the major problem with settlement price is that it can vary significantly with the actual price and this difference causes problem in using hedging with future contracts. Due to this, Hedging with future contracts cannot be used as it has many drawbacks.
Other choice of hedging is the option trading which is now preferred by most profession managers and is becoming a more famous type of trading. Precise measurements are ensured in option trading as it uses the actual price of any underlying asset instead of some derived price. And so option is preferred commonly in hedging.

At the beginning, the contract was based on future between the buyer and the seller and it was decided to trade in the settlement price even if the price hikes or becomes less. This causes the buyer profit or loss, as there remain uncertainties. But now using option trading the effect is minimized by using the actual price of the stock instead of the settlement price. This is the real function of hedging. Hedging is important in all businesses specially the trading types. And if you do not trade in the actual spot price of stock or any underlying asset you will have to face a difficulty at the time of payment, either you or the other party will be confused to do business at what rate. To remove this entire problem the phenomenon of Hedging was derived.

Option trading is a better option in hedging than future contracts because it uses the actual spot prices of the underlying assets and not the settlement prices. As stock market have fluctuations every second. If an asset is $20 now may be the next day you ask its rice becomes 19$ and due to this reason future trading is becoming less popular and on the other hand option trading is earning a good repute among traders.