Stock futures and stock options are deadline-based agreements between buying and selling parties for an shares of equities. Both contracts provide investors with strategic opportunities to make money and hedge current investments. Before an investor can decide to trade either futures or options, they must understand the four primary differences between the two.

1. Contract Premiums

When buyers of call and put options purchase a derivative, they pay a one-time fee called a premium, and sellers of call and put options collect the premium. The value of the contracts decays as the settlement date approaches. However, the premium price rises and falls, allowing users to sell their calls and puts for a profit ahead of the expiration date. Those who sell options can purchase call options to cover the size of their position as well.

Stock futures can either be purchased on single stocks (SSFs) or focus on the broader performance of an index like the S&P 500. However, with stock futures, the buying party pays something other than a contract premium at the point of purchase. Buying parties pay something known as initial margin, which is a percentage of the price to be paid for the stocks.

2. Financial Liabilities

When someone buys a stock option, the only financial liability is the cost of the premium at the time the contract is purchased. However, when a seller opens put options for purchase, they are exposed to maximum liability on the stock’s underlying price. If a put option gives the buyer the right to sell the stock at $50 per share but the stock falls to $10, the person who initiated the contract must agree to purchase the stock for the value of the contract, or $50 per share.

Futures contracts, however, offer maximum liability to both the buyer and seller of the agreement. As the underlying stock price shifts in the favor against either the buyer or seller, parties may be obligated to inject additional capital into their trading accounts to fulfill daily obligations.

3. Buyer and Seller Obligations at the Time of Expiration

Those who purchase call or put options receive the right to buy or sell a stock at a specific strike price. However, they are not obligated to exercise the option at the time the contract expires. Investors only exercise contracts when they are in the money. If the option is out of the money, the contract buyer is under no obligation to purchase the stock.

Purchasers of futures contracts are obligated to buy the underlying stock from the seller of that contract upon expiration no matter what the price is of the underlying asset. If the futures contract calls for the purchase of the stock at $100, but the underlying stock is valued at $80 at contract expiration, the buyer must buy at the agreed upon price. Still, it is very rare for stock futures to be held to their expiration date.

4. Investment Flexibility

Stock options provide investors with both the right to buy a stock (but not the obligation) and the right to sell the same stock (but not the obligation) through calls and puts, respectively. But stock options also provide investors with a breadth of flexible strategies unavailable through futures trading. Each strategy offers different profit potentials for investors and speculators. (For more information, see: 10 Options Strategies to Know.)

Stock futures on the other hand offer very little flexibility once a contract is opened. As noted, investors purchase the right and obligation for fulfillment once a position is opened.

The Bottom Line

Deciding to use stand-alone options, stock futures or a combination of the two requires an assessment of individual expectations and investment goals.

One of the first questions an investor must ask is how much risk they are willing to take on in their investment strategies. Options trading provides less upfront risk for buyers given the lack of obligation to exercise the contract. This provides a more conservative approach, particularly if traders use a number of additional strategies like bull call and put spreads to improve the odds of trading success over the long term. (For related reading, see: Pick the Right Options to Trade in Six Easy Steps.)

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.