Mar 11, 2024, 08:39:38 PM IST
Futures and Options are two frequently used terms in financial markets. Here are the key differences between the two to help you choose the right derivative tool for your investments.
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In Futures, it is obligatory to buy/sell at a future date. Meanwhile, an Options buyer has the right to buy/sell.
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Both Futures and Options have a standardised agreement.
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In Futures, it is necessary to fulfil contract obligations. Meanwhile, Options holder can choose to exercise.
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Both buyer and seller have obligations in Futures whereas in Options the buyer has the right and the seller has the obligation.
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There is unlimited profit and loss potential in Futures whereas an Options holder has limited risk and unlimited profit potential.
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In Futures there is a direct correlation with underlying, meanwhile, in Options there is a non-linear relationship due to pricing.
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In Futures there is speculation or hedging. In Options there is speculation, hedging and income generation.
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Margin requirements apply in Futures whereas the premium is paid upfront in Options.
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Futures see daily settlement whereas Options settlement is exercised or expires at the expiration date.
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Futures include commodities, stocks and indices; Options include equity options, index options and commodities.
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There is less flexibility in Futures due to obligation as compared to Options where there is more flexibility as it’s a right.
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The major purpose of Futures is hedging against price fluctuations whereas that of Options is hedging, speculation and income generation.
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