Difference between Futures and Options

Futures and options both the term are used in the context of derivatives market as a tool to hedge risk and also by speculators to earn profit. Though both futures and options are derivatives as they derive their value from underlying asset, but there are many differences between futures and options let’s look at some of them –

  1. Futures refers to standardized contract through which the parties to contract agree to buy or sell specific asset at future date whereas under options there is a contract between the buyer and seller through which the buyer get the right but not obligation to buy or sell an asset at particular price and at particular time.
  2. Under futures both the buyers and sellers are under obligation to complete the transaction whereas under options only seller is under obligation to complete the contract whereas the buyer has the right but not obligation and hence the buyer is at advantage as far as options are concerned.
  3. In futures there is no premium paid or received for buying the future contract whereas under options the buyer of the option has to give premium to the seller for the risk which the seller of option takes.
  4. In futures risk of both buyer and seller is unlimited whereas under options the risk of seller is unlimited but as far as buyer is concerned his or her risk is limited to the amount of premium the buyer has paid.
  5. In options one can make many strategies so as to profit from movement in market price of underlying like strip option strategy, straps option strategy, straddles option strategy, however in case of futures such strategies are not possible and hence it is less flexible than options.
  6. In futures one needs to have money so as to pay both upfront margin and also mark to market margin which changes according the price of underlying whereas in case of options one needs less money because one has to pay premium only and nothing else.

As one can see from the above that there are many differences between future and option and it depends on investors or trader whether he or she wants to use futures or options as a way to hedge against the risk and also to profit from volatility in markets.

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