DIFFERENCE BETWEEN FUTURES AND OPTIONS

Meaning OF options
Options are based on the value of an underlying security such as a stock. As noted above, an
options contract gives an investor the opportunity, but not the obligation, to buy or sell the asset
at a specific price while the contract is still in effect. Investors don't have to buy or sell the asset
if they decide not to do so.

Meaning of Futures
A futures contract is the obligation to sell or buy an asset at a later date at an agreed-upon price.
Futures contracts are a true hedge investment and are most understandable when considered in
terms of commodities like corn or oil. For instance, a farmer may want to lock in an acceptable
price upfront in case market prices fall before the crop can be delivered. The buyer also wants to
lock in a price upfront, too, if prices soar by the time the crop is delivered.

Point of difference Futures Options

Difference in In a futures contract, obligation lies Buyer of the options contract is given the right but
obligation to comply with both the seller and the buyer not the obligation. However, seller is responsible
with the terms of the to settle the terms of the contract to comply with the contract if the buyer exercises
contract before the expiry date the terms.

In case of options, only premium amount is

Upfront margin is required for required to be paid that results in low cash outflow.
Cash Outflow purchasing futures contract, so Also, it is the maximum amount that an option
cash outflow is usually large purchaser can lose in case of adverse price
movement

Degree of profit and Profit and loss potential is Profit potential is unlimited while scope of loss for
loss unlimited. the buyer of call/put is limited

Going to the market and taking opposite position

Method of profit Profits in futures position are or exercising the option or wait until the maturity
realization marked-to-market on a daily basis of the contract for realizing the difference between
asset price and strike price

Speculate or hedge risk and also to

obtain physical delivery of
Purpose Primarily used as hedge instruments
underlying asset in future period of
time