Difference Between Options and Futures
Basis |
Futures |
|
---|---|---|
Contract Type | Grants the holder the right, without imposing any duty, to purchase or sell the underlying asset at a specified price. | Obliges both parties to fulfill the contract by buying or selling the underlying asset at a predetermined price. |
Obligation | Holder has the choice to exercise or not exercise the option. | Both parties are obligated to fulfill the contract terms. |
Risk | Limited to the premium paid for the option. | Potentially unlimited, as both gains and losses can be substantial. |
Market Direction | Depending on the type of option, it allows you to profit from price changes that are either up or down. | Profits can be made from both upward and downward price movements. |
Profit Potential | Unlimited potential profit if the market moves favorably. | Limited to the difference between the entry price and the market price at expiration. |
Cost | Options involve the payment of a premium to the option seller. | Initial margin payment is required before entering into a futures contract. Frequent modifications may be required due to market conditions. |
Common Use | Used for hedging, speculation, or generating income. | Used for hedging and speculation on future price movements. |
Flexibility | Provides flexibility because the holder can choose whether or not to exercise the option. | Less flexible as both parties are generally obligated to fulfill the contract. |
Expiration | Options have a limited lifespan and expire on a specific date. | Futures contracts have expiration dates, but new contracts are continually issued. |
Examples | Call and put options. | Contracts on commodities, financial instruments, or indices. |