Difference Between Options and Futures

In the commodities market, futures contracts (futures) and futures options (options) are two ways to trade.

Futures contracts need you to buy or sell the commodity, whereas futures options allow you the right to buy or purchase the futures contract without having to do so.

But before going through the difference between futures and options, let us first understand futures and options. 

Understanding Options and Futures

Options and futures contracts are both standardized agreements traded on an exchange such as the NYSE, NASDAQ, BSE, or NSE.

A futures contract only allows trading of the underlying asset on the date specified in the contract, whereas options can be exercised at any time before they expire.

Both options and futures have a daily settlement, and trading options or futures require a margin account with a broker. These financial instruments are used by investors to mitigate risk or speculate (their price can be highly volatile). Stocks, bonds, currencies, and commodities can all be used as underlying assets for futures and options contracts.

Options vs Futures - Which is Better?

The detailed difference between options and futures are listed below in the table-

Particulars

Futures

Options

Meaning

Futures contracts are contracts to trade an underlying asset at a predetermined price at a future date.

The buyer and seller are both bound to complete the transaction on that date. Futures are standardized contracts that can be bought and sold on an exchange by investors.

Options contracts are standardized contracts that allow investors to trade an underlying asset at a predetermined price before a specific date (the expiry date for the options).

Call and put options are the two types of options available. The buyer of a call option has the right (but not the responsibility) to purchase the underlying asset at a predetermined price before the expiration date, whereas the buyer of a put option has the right to sell the security.

Risk

They are subject to higher risks.

They are subject to limited risk.

Profit or Loss

It could reap unlimited profit and loss.

It could again bring you unlimited profit and loss, although it reduces the chances of incurring a potential loss.

Obligation

The buyer is obliged to buy the asset on the certain stated future date.

In this, the buyer will have no obligation to buy or execute the contract.

Contract Execution

A futures contract is executed on the date agreed upon.

On this certain date, the buyer buys the underlying asset.

Options contracts can be executed by the buyer anytime before the expiry date.

Hence, an individual is open to buying the asset whenever the conditions seem correct.

Advance Payment

In a futures contract, there is no upfront cost when entering.

Although, the buyer is supposed to pay the agreed price for the asset ultimately.

The buyer in an options contract is supposed to pay a premium. The premium payment allows the options buyer the chance to not purchase the asset on a future date if it tends to become unattractive.

Note that if the options contract holder opts not to buy the asset, the premium paid is the amount he is supposed to lose.

What is the Difference Between Options and Futures Based on Liquidity?

Futures contracts are the purest commodity derivative. They are as near to trading the actual commodity as you can go without actually trading one.

These contracts have a higher degree of liquidity than options contracts. As a result, futures contracts are more suitable for day trading. 

Futures and Options Difference Based on Value

Futures contracts move faster than options contracts because options move in tandem with futures contracts.

For at-the-money options, this sum may be 50%, while for deep out-of-the-money options, it could be only 10%. You don't have to be concerned about the constant option value degradation that can occur over time.

Options vs Futures Difference Based on Capital

When it comes to capital value, futures options are considered to be risky. In other words, the worth of options diminishes with each passing day. This is known as time decay, and it increases as options approach expiration.

Thus, we can say that Futures and Options - both are exchange-traded derivative contracts that are traded on the stock exchanges such as - the Bombay Stock Exchange or the National Stock Exchange.

It is important to futures and options difference to use these trading tools in the best possible manner. The underlying asset covered by them are the financial products like commodities, currencies, bonds, stocks, and more. 

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