What are the Differences between Future and Options?
A futures contract is like a put or a call option; in that, you’re selling an underlying asset (like a bond, stock or foreign currency) and paying for that asset at some specific date in the future.
For example, if you buy a futures contract for $100 of a company’s stock on July 31st, you’re selling the stock on that date for $100. If the stock price goes up, you’re effectively “calling” the company and forcing them to buy your stock at the $100 price by the end of the contract.
An option is a financial instrument that gives you the right to buy or sell an asset at a given price within a specified period of time (the “expiration” date). If the underlying asset moves up or down, the value of your option will change, too.
For example, if the price of a stock is $100 at the time you buy an option, your option will be worth $110 (the $100 price + $10 premium). If the price of the stock goes up to $110, your option will now be worth $120.
Future and Options have recently been very popular in financial markets and among investors.
There are some differences between both, elaborated as below:
Differences between future and options
- The futures involves obligation while the options involve right. In the future, both parties must fulfil the obligation, but in the case of options, only one party must perform the contract. The option holder has the right to exercise or not to exercise his option. When he decides to exercise his option, the option writer must fulfil his obligation.
- In the futures, there is no premium payable to buy the contract. But in the case of options, the option holder has to pay a premium to buy the option.
- The profit or loss of the parties depends upon the specified price and the actual price on the settlement day under futures. Hence, both parties are exposed to unlimited profit or loss. However, in the case of options, the loss of the option holder is limited to the premium paid, but his gains are not limited. Similarly, the option writer’s profit is limited to the premium received, but he is exposed to unlimited risk.
- Normally, the maturity period of futures is longer than that of the options.
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