Options vs Futures: What's the Difference?

Published on: Sat Feb 25 2023

Options vs Futures: What's the Difference? –

Options and futures are two of the most popular instruments for trading financial derivatives. Both allow traders to speculate/ponder on an underlying asset's price movement without actually owning it. However, traders should be aware of some key distinctions between options and futures. In this blog, we'll look at the distinctions between options and futures.

What is Option?

An option is a financial contract that grants/gives the buyer the right, but not the obligation, to purchase or sell an underlying asset at a predetermined price and time. Options can be used for risk management or speculation.

What is meant by futures?

A futures contract is a standardized agreement between two parties to buy or sell an underlying asset at a specified/particular price and date. Futures are traded on an exchange and are used for hedging or speculation.

Contract requirements

Contract specifications differ/vary between options and futures. The strike price, which is the price at which the underlying asset can be bought or sold, the expiration date, which is the date on which the option expires, and the contract size, which is the amount of the underlying asset that the option represents, are all specified in options contracts.

Futures contracts specify the delivery/shipping date, which is when the underlying asset must be delivered, the delivery location, which is where the underlying asset must be delivered, and the contract size, which is the amount of the underlying asset that the futures contract represents.

Obligation

The obligation imposed/levied on the buyer and seller is one of the key differences between options and futures.

When you purchase an option, you are acquiring the right, but not the obligation, to purchase or sell the underlying asset at the specified price and time. You have the option to exercise it or let it lapse.

When you purchase a futures contract, you agree to buy or sell the underlying asset at the price and time specified. You have no choice but to let the contract expire.

Price movement

Another significant distinction between/among options and futures is how they react to price movement.

Changes in the underlying asset's price, volatility, time to expiration, and interest rates all have an impact on option prices. When the underlying asset's price rises, the price of a call option (which grants the buyer the right to buy the underlying asset) rises, while the price of a put option (which grants the buyer the right to sell the underlying asset) falls.

Futures prices are influenced/affected by changes in the underlying asset's price, interest rates, and time to delivery. When the underlying asset's price rises, the price of a long futures position (which obligates the buyer to purchase the underlying asset) rises, while the price of a short futures position (which obligates the seller to sell the underlying asset) falls.

Margin requirements

Options and futures also have different margin requirements.

When you buy/purchase an option, you pay a premium, which is the option's cost. You are not required to provide any additional margin.

When you buy/ purchase a futures contract, you must pay a margin, which is a percentage of the contract value. The margin is intended to cover potential losses if the underlying asset's price moves against your position.

Finally, options and futures are popular financial derivatives that enable traders to speculate on the price movement of an underlying asset without actually owning it. There are, however, some significant differences between the two, such as contract specifications, obligations, price movement, and margin requirements. When deciding/determining which instrument to trade, traders should be aware of these distinctions.

Returns are subject to market risk.

Past performance do not assure future returns.

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