There are many instruments suitable for day trading: stocks, futures, options on stocks, options on futures, and options on market indexes. The concern of the day trader should be with whether the particular option or future is sufficiently liquid and has adequate leverage to enable profits to be make on a day trader's time frame. Beyond that, the choice of instruments should be based on the trader's strategy, previous experience, and market conditions.
Futures and options each have unique characteristics. They respond differently to time, to changes in price of the underlying security, and in other ways.
Futures are good to trade if you are looking to capitalize on moves that may take some time to develop. They are also efficient in the sense of closely tracking movement in price of the underlying commodity. Many futures are highly liquid so good fills can be obtained with little slippage. Commissions are low. However, with futures, you must limit risk by quickly exiting positions that move against you. Futures can be traded long or short, depending on whether you expect the underlying index or commodity to rise or fall in price.
Unlike futures, options are subject to substantial time decay. However, they can limit downside risk. The holder of a put or call can only lose the original cost of the put or call, while the upside potential is unlimited. This makes options useful for trades in which the market may move substantially against you before moving in your favor. Therefore, options are best when speculating on moves that are expected to take place quickly and when it is desirable to hold on to a position, even through momentary adverse swings. Since a day trader is only concerned with short-term moves, options are excellent for day trading.
Finally, the decision to trade futures or options must be based on the underlying markets. For the day trader interested in bonds, currencies, grains, livestock, and the weather, futures are probably the to go. One can speculate on oil, gold, and the overall stock market using either futures or index options. There are futures on heating oil, and the S&P 500 market index options on oil stocks, gold stocks, and the OEX. A wide variety of index options are available. These are great for speculating on trends in various stock market sectors. Action in individual stocks can be day traded with standard equity options.
