Costs of Trading - Hedging with Forwards

[Gpessah]

Question -
Does anyone know why this would be true and can help explain it?
“Forward contracts have greater opportunity costs than option contracts” ?

 

[megamind]

Forwards have symmetric payoffs ie you can both gain and lose. Whereas options have non-symmetric payoffs ie you tend to enjoy the gains but you have no other opportuity costs apart from premium paid in case the price moves adversly and you let the option expire.
Hope this makes sense.

 

[Galli]

With forwards you aren’t outlaying cash at the beginning of the trade right ? I’m failing to see how there is a greater opportunity cost with forwards when you could use the upfront cost of the forward trade in something else.

 

[Chris1029384756]

Think of it from the hedging perspective. For example, you’re hedging a stock position with either equity forwards or options.
If you use forwards, you lock in a selling price today to eliminate downside. You also eliminate any upside potential, and that is the opportunity cost of the hedge.
If you use, say, put options instead, you still retain the upside potential and therefore have less opportunity cost.

 

[Galli]

^makes sense, thanks.