What Is The Difference between Futures and Options?
A futures contract refers to an agreement amongst two parties for buying and selling of an underlying asset at a certain price and at a certain date in the future. These contracts can also be bought if you do not have sufficient money in hand but can buy in future. The buyer and seller both are under obligation for execution of the contract.
An option provides the buyer with the right but it does not contain any obligation. On the other hand, the seller has to undergo an obligation to adhere with the contract. Options are of two types: call option and put option.
Difference with respect to earning profits and suffering losses
In the futures market, you earn substantial amount of profits as a buyer. In simple words, the profit earning chances are unlimited. Simultaneously, you can also suffer from unlimited losses. Thus, it can be said that futures contracts come with the potential of earning unlimited profits as well as losses. On the contrary, the loss incurred in trading option is limited. However, the potential of earning profits is unlimited in case of options.
Difference with respect to payments and cash outflow
While purchasing future contracts, you need to pay margin and this involves substantial amount of cash outflows. However, in case of options, you are supposed to pay only the premium component. Thus, option involves relatively less amount of cash outflow.
Difference with respect to obligation
A futures contract assigns obligation to the buyer for purchasing a particular asset. The seller is also under obligation for selling and delivering the asset as per specifications. On the other hand, options assign only the right to the buyer and not the obligation for buying or selling the asset during the contract period.
Difference with respect to size of the underlying asset or stock
This is also an important element of difference with respect to futures and options. This refers to the size of the underlying asset or stock. In case of futures, the underlying position is larger. This result in increasing of risks involved in future contracts. If you are new to futures, then you may have to face the risks. Options have relatively less size of underlying position and hence, the risks involved are comparatively less.
Difference in the manner of receiving profits
The profits or the changes in the value of futures contracts are reflected on daily basis in the account at the end of the day. Whereas, in case of investor of options, the profits can be realized in three ways: acquiring the opposite position in the market, exercising of option, and after the expiry of the option period.
Difference with respect to popularity
If you are a speculator, then futures is your choice of trading. On the other hand, options are popular amongst hedgers.
Conclusively, one can find out the differences in the futures and options and invest suitably.
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