The main fundamental difference between
options and
futures lies in the obligations they put on their buyers and sellers. An option gives the buyer the right,
but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract. A futures contract gives the buyer the
obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date, unless the holder's position is closed prior to expiration.
Aside from commissions, an investor can enter into a futures contract with no upfront cost whereas buying an options position does require the payment of a
premium. Compared to the absence of upfont costs of futures, the option premium can be seen as the fee paid for the privilege of not being obligated to buy the
underlying in the event of an adverse shift in prices. The premium is the maximum that a purchaser of an option can lose.
Another key difference between options and futures is the size of the underlying position. Generally, the underlying position is much larger for futures contracts, and the obligation to buy or sell this certain amount at a given price makes futures more risky for the inexperienced investor.
The final major difference between these two financial instruments is the way the gains are received by the parties. The gain on a option can be realized in the following three ways:
exercising the option when it is deep
in the money, going to the market and taking the opposite position, or waiting until expiry and collecting the difference between the asset price and the
strike price. In contrast, gains on futures positions are automatically 'marked to market' daily, meaning the change in the value of the positions is attributed to the futures accounts of the parties at the end of every trading day - but a futures contract holder can realize gains also by going to the market and taking the opposite position.
To learn more about options see the tutorial
Options Basics.
To learn more about futures see the tutorial
Futures Fundamentals.
