Previously in this column, we discussed why derivatives (F&O segment) is a preferred venue for intraday trades compared to the spot market (cash segment). This week, we discuss why futures may be preferable over options for such intraday trades.

Implied vols 

The gains on both futures and options are treated as non-speculative business income, whether trades are intraday or positional. So, the choice between futures and options comes down to risk-return trade-off. Previously, we discussed in this column that the choice between the two is not easy. This is because options do not suffer from time decay on an intraday basis. So, gain from either position is based on the position’s delta. Futures contract moves nearly one-to-one with the underlying. The movement in option price is based on the option’s delta. So, you could argue that buying two at-the-money (ATM) strikes would give near one-to-one movement with the underlying, as ATM options have a delta close to 0.50. Note that delta captures the approximate change in option price for a one-point change in the underlying. 

There is another factor to consider. European options can be exercised only at expiry, unlike US options which can be exercised any time before expiry. While it is optimal to sell a US option any time before expiry because you can also capture time value, exercising may be the only choice when an option is deep in-the-money (ITM) well before expiry. This is because options gradually lose liquidity as they move into ITM. But early exercise is not possible for European options. So, liquidity is important to close your positions while trading European options. 

Now, suppose you initiate an intraday long position in an ATM call. The underlying sharply moves up, and the ATM call becomes ITM. It is possible that the option gradually loses liquidity. That means the demand for the strike will reduce. A reduced demand will translate into the price not moving in line with the delta of the option. That is, the time value will reduce, but not because of time decay. Rather, the time value will reduce because of decrease in implied volatility, a function of a lower demand for the strike. The upshot is that gains from options may not be as much as the gains from futures, for a given change in the underlying price. Therefore, futures contract is preferable for intraday trades.

Quick tip
Gains from options may not be as much as the gains from futures for a given change in the underlying price

Optional Reading

The near one-to-one movement with the underlying means that futures contract will expose you to high downside risk. It is, therefore, important that you trade futures with strict stop-loss levels. The stop-loss level must be determined preferably based on the futures price chart using continuous prices (a seamless graph that shows near-month futures contract over a longer period). You must be mindful of the transaction cost if you want to engage in scalping trades (small gains); you can determine transaction costs using a brokerage calculator available on the Internet.

(The author offers training programmes for individuals to manage their personal investments)

Published on June 21, 2025