What is the difference between options and futures?

By Investopedia Staff AAA
A:

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.

RELATED FAQS

  1. What's the best way to play backwardation in the futures market?

    Backwardation is a market condition in which a futures contract far from its delivery date is trading at a lower price than ...
  2. What are the best indicators for evaluating technology stocks?

    Technology stocks are often some of the most discussed stocks on the news. How can investors spot the company that will roll ...
  3. What technical indicators can I use to find undervalued stock?

    Investors seeking new ideas may want to look to technical analysis to see whether the market has undervalued a particular ...
  4. What's the difference between binary options and day trading?

    Binary options and day trading are both ways to make (or lose) money in the financial markets, but they are different animals. ...
RELATED TERMS
  1. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  2. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  3. Short Put

    A type of strategy regarding a put option, which is a contract ...
  4. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  5. Mass Index

    A form of technical analysis that looks at the range between ...
  6. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
comments powered by Disqus
Related Articles
  1. Day Trading Strategy Steps
    Trading Strategies

    Day Trading Strategy Steps

  2. The Top Technical Indicators For Options ...
    Options & Futures

    The Top Technical Indicators For Options ...

  3. Basics of Algorithmic Trading: Concepts ...
    Trading Strategies

    Basics of Algorithmic Trading: Concepts ...

  4. The Vital Importance of Choosing The ...
    Trading Systems & Software

    The Vital Importance of Choosing The ...

  5. Using Normal Distribution Formula To ...
    Investing Basics

    Using Normal Distribution Formula To ...

Trading Center