What are the key differences between futures and options?
The essential difference between futures and options is that a futures contract requires the buyer to purchase the underlying asset, which must be provided by the seller, while options give their buyer the right to buy or sell the underlying, but without requiring them to do so.
A future is a contract to buy or sell an underlying stock or other assets at a pre-determined price on a specific date. On the other hand, options contract gives an opportunity to the investor the right but not the obligation to buy or sell the assets at a specific price on a specific date, known as the expiry date.
A futures/forward contract gives the holder the obligation to buy or sell at a certain price. An option gives the holder the right to buy or sell at a certain price.
A forward contract is a private, customizable agreement that settles at the end of the agreement and is traded over the counter (OTC). A futures contract has standardized terms and is traded on an exchange, where prices are settled daily until the end of the contract.
It is a legally binding agreement to buy or sell an asset at a future date. Options trading, on the other hand, gives you the right, but not the obligation, to buy or sell an asset at a predetermined price at a specified time in the future.
An option gives the buyer the right, but not the obligation, to buy (or sell) an asset at a specific price at any time during the life of the contract. A futures contract obligates the buyer to purchase a specific asset, and the seller to sell and deliver that asset, at a specific future date.
Options | Futures |
---|---|
Options can be exercised early or lapsed without any obligation. | Futures must be fulfilled or closed before expiration. |
Options have lower liquidity and volume than futures. | Futures have higher liquidity and volume than options. |
Futures are a contract that the holder the right to buy or sell a certain asset at a specific price on a specified future date. Options give the right, but not the obligation, to buy or sell a certain asset at a specific price on a specified date. This is the main difference between futures and options.
The key difference between the two is that futures require the contract holder to buy the underlying asset on a specific date in the future, while options -- as the name implies -- give the contract holder the option of whether to execute the contract.
They are both financial contracts you would open to trade on a wide variety of markets. You're required to settle your trade in full with futures. But with options, you can simply choose not to and pay the premium – also known as the deposit or margin.
What are three major differences between forward and futures?
Feature | Forward Contract | Future Contract |
---|---|---|
Settlement Process | At contract maturity | Daily settlement |
Trading Venue | Over-the-counter (OTC) | Organised exchanges |
Liquidity | Generally lower due to customisation | Higher due to standardisation |
Regulation | Less regulated | Heavily regulated |
The key difference between a forward and a futures contract is: a forward contract is customized where a futures contract is not. The clearing corporation's main role in the futures market is to: act as the counterparty to both sides of the transaction, thereby guaranteeing payment.
As we said in our previous article, forwards, futures, and swaps are forward commitments. This means they are contracts requiring each party to perform a specified action in the future. Whereas, options and credit derivatives are contingent claims.
Futures have several advantages over options in the sense that they are often easier to understand and value, have greater margin use, and are often more liquid. Still, futures are themselves more complex than the underlying assets that they track. Be sure to understand all risks involved before trading futures.
Similarities Between Futures & Options
They are both financial contracts that exist between two parties – the buyer and seller of an underlying asset. They can both be traded on public exchanges, although some of the more complex contracts are only sold over the counter.
Options are generally considered safer than futures because the potential loss in options trading is limited to the premium paid, whereas futures carry higher risk due to potential unlimited losses resulting from leverage and market movements.
The Bottom Line. While the advantages of options over futures are well-documented, the advantages of futures over options include their suitability for trading certain investments, fixed upfront trading costs, lack of time decay, liquidity, and easier pricing model.
The difference between option and future contract is that a future contract is an obligation to buy/sell the commodity, when the options give us the right to buy/sell. Clearing corporation is an independent corporation whose stockholders are member clearing firms. Each maintains a margin account with the clearinghouse.
The key difference between CFDs and options is how each leveraged derivative works. Both take the form of contracts based on underlying financial markets, but whereas an option gives you the right to trade a market at a set price, in a CFD you agree to exchange a market's price movements.
The settlements that occur over these contracts can be via cash or physical, both having their benefits and drawbacks. An option is essentially a one-sided version of the forward contract. Key learning objectives: Define OTC and ETDs.
What is the difference between futures contracts?
Futures Contracts
Futures are the same as forward contracts, except for two main differences: Futures are settled daily (not just at maturity), meaning that futures can be bought or sold at any time. Futures are typically traded on a standardized exchange.
Futures provide direct exposure with higher risk, while options offer strategic flexibility and limited risk. A diversified approach may incorporate both instruments based on specific investment goals and market conditions. Futures involve higher risk due to the obligation to buy or sell.
Futures are contracts with expiration dates, while stocks represent ownership in a company.
Financial example 1:
The cost of the option contract is $100. If, at the end of one month, the price of XYZ stock is above $55 per share, you will exercise your option to buy the stock at $55 per share and then sell it immediately at the current market price for a profit.
References
- https://www.motilaloswal.com/blog-details/which-is-more-risky-futures-trading-or-options-trading/20719
- https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9275112/
- https://smartasset.com/investing/futures-vs-stocks
- https://www.nerdwallet.com/article/investing/started-futures-trading
- https://www.kotaksecurities.com/futures-and-options/difference-between-futures-and-options/
- https://ninjatrader.com/futures/why-trade-futures/futures-vs-stocks/
- https://capital.com/cfds-vs-options
- https://www.next-kraftwerke.com/knowledge/contract-for-difference
- https://www.samco.in/difference-between-options-and-futures
- https://www.quora.com/Can-you-trade-futures-without-leverage
- https://upstox.com/learning-center/futures-and-options/top-5-futures-trading-strategies-to-know-in-2023-2024/
- http://www.zaner.com/3.0/education/content.asp?page=ondemand/50rwftlm.html
- https://www.nfa.futures.org/rulebooksql/rules.aspx?Section=9&RuleID=9050
- https://www.ig.com/en/futures-trading/what-are-futures-how-do-you-trade-them
- https://www.tradestation.com/insights/2023/02/22/top-contracts-for-trading-futures/
- https://homework.study.com/explanation/which-of-the-following-is-true-a-futures-contracts-are-traded-on-exchanges-but-forward-contracts-are-not-b-both-forward-and-futures-contracts-are-traded-on-exchanges-c-forward-contracts-are-traded-on-exchanges-but-futures-contracts-are-not-d.html
- https://corporatefinanceinstitute.com/resources/derivatives/futures-forwards/
- https://www.motilaloswal.com/blog-details/how-are-futures-prices-determined/21311
- https://www.bajajfinserv.in/futures-and-options
- https://www.fool.com/investing/how-to-invest/stocks/futures-vs-options/
- https://www.schwab.com/futures/what-are-futures
- https://www.wealthwithin.com.au/learning-centre/leveraged-trading/leverage-trading-the-pros-and-cons
- https://financeunlocked.com/videos/derivatives-unlocked-2-2
- https://www.motilaloswal.com/article-details/what-is-the-best-leverage-in-any-forex-trading-strategy/5474
- https://www.fisdom.com/which-is-better-futures-or-options/
- https://quizlet.com/32732125/fin-431-final-flash-cards/
- https://gitnux.org/most-liquid-futures/
- https://resources.wolframcloud.com/FormulaRepository/resources/Stock-Contracts-Optimal-Number
- https://www.investopedia.com/ask/answers/031015/how-risky-are-futures.asp
- https://www.5paisa.com/stock-market-guide/derivatives-trading/about-futures-contract
- https://www.ironfx.com/en/how-many-cfd-traders-lose-money/
- https://www.axiory.com/trading-resources/strategies/no-leverage
- https://www.investopedia.com/articles/optioninvestor/09/get-started-with-futures.asp
- https://www.indiainfoline.com/knowledge-center/derivatives-market/what-are-futures-contracts-and-how-do-they-work
- https://www.schwab.com/learn/story/how-futures-margin-works
- https://www.indiainfoline.com/knowledge-center/derivatives/how-are-futures-prices-determined
- https://www.cityindex.com/en-au/cfd-trading/cfds-vs-futures/
- https://www.schwab.com/futures/faqs
- https://www.investopedia.com/articles/active-trading/070113/using-index-futures-predict-future.asp
- https://finimize.com/content/using-leverage
- https://www.dormantrading.com/trading-resources/most-active/
- https://www.schwab.com/futures/futures-margin
- https://www.investopedia.com/articles/active-trading/032515/advantages-trading-futures-over-stocks.asp
- https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/economicpurpose.html
- https://www.schwab.com/learn/story/7-tips-every-futures-trader-should-know
- https://www.binance.com/en/square/post/1424550
- https://study.com/academy/lesson/valuation-of-futures-contracts.html
- https://en.wikipedia.org/wiki/Futures_contract
- https://www.schwab.com/learn/story/trading-futures-vs-stocks-whats-difference
- https://www.investopedia.com/articles/active-trading/020216/five-advantages-futures-over-options.asp
- https://stoxbox.in/marketopedia/futures-trading/leverage-ratio
- https://www.bajajfinserv.in/futures-contract
- https://study.com/academy/lesson/what-is-an-option-contract-example-definition.html
- https://www.bajajfinserv.in/index-futures
- https://www.linkedin.com/pulse/what-leverage-good-100-exness-in-india-spylc
- https://futures.tradingcharts.com/tafm/tafm6.html
- https://www.investopedia.com/terms/t/tick-size.asp
- https://www.cftc.gov/LearnAndProtect/AdvisoriesAndArticles/FuturesMarketBasics/index.htm
- https://www.investopedia.com/terms/c/cashmarket.asp
- https://www.cityindex.com/en-au/options-trading/cfd-vs-options/
- https://quizlet.com/18908657/options-and-futures-markets-exam-1-flash-cards/
- https://tastytrade.com/learn/futures/futures-characteristics/
- https://365financialanalyst.com/knowledge-hub/trading-and-investing/what-are-forward-contracts-futures-contracts-and-swaps/
- https://www.nirmalbang.com/knowledge-center/future-pricing-formula.html
- https://www.investopedia.com/articles/active-trading/090215/analyzing-5-most-liquid-commodity-futures.asp
- https://m.economictimes.com/markets/options/futures-vs-options-understanding-the-differences-and-choosing-the-right-derivative-instrument/articleshow/108343850.cms
- https://www.angelone.in/knowledge-center/futures-and-options/types-of-futures
- https://ninjatrader.com/learn/how-to-trade-futures/place-a-futures-order/
- https://www.angelone.in/knowledge-center/futures-and-options/what-are-futures
- https://www.religareonline.com/blog/difference-between-forward-and-future-contract/
- https://www.investopedia.com/terms/f/futures.asp
- https://quizlet.com/603684808/ch-14-derivatives-introduction-futures-swaps-flash-cards/
- https://www.ampfutures.com/education/futures-vs-stocks
- https://capital.com/cfds-vs-futures
- https://tradeproacademy.com/options-vs-futures-which-is-more-riskier/
- https://www.investopedia.com/terms/f/futurescontract.asp
- https://www.axi.com/int/blog/education/cash-vs-futures-market
- https://economictimes.indiatimes.com/definition/futures-contract
- https://www.quora.com/Do-stock-futures-always-predict-the-market-for-the-day
- https://www.ironfx.com/en/is-cfd-trading-easy/
- https://geplcapital.com/knowledge-centers/blog-article/the-impact-of-market-volatility-on-options-and-futures-trading
- https://www.studysmarter.co.uk/explanations/macroeconomics/economics-of-money/futures-and-options/
- https://www.britannica.com/money/futures-contract-specifications
- https://corporatefinanceinstitute.com/resources/wealth-management/variable-price-limit/
- https://jpmcc-gcard.com/wp-content/uploads/2018/10/01-14-15_till_-_why_futures_contracts_succeed_or_fail.pdf
- https://www.investopedia.com/ask/answers/06/forwardsandfutures.asp
- https://indiacorplaw.in/2023/11/revisiting-the-ban-on-futures-trading-of-agri-commodities-in-india.html
- https://www.optionstrading.org/basics/comparing/futures/
- https://quizlet.com/447412935/chapter-9-flash-cards/
- https://ninjatrader.com/futures/why-trade-futures/futures-vs-stocks-options/
- https://www.ig.com/au/cfd-trading/cfds-vs-share-trading
- https://www.investopedia.com/terms/b/basis-trading.asp
- https://www.quora.com/What-is-the-difference-between-future-and-options-trading-Which-is-the-best
- https://www.investopedia.com/ask/answers/06/futuresconvergespot.asp
- https://www.indiainfoline.com/knowledge-center/derivatives/what-are-the-risks-of-futures-contract
- https://tiomarkets.com/ms/article/cfd-vs-futures-trading
- https://www.forex.com/en-ca/news-and-analysis/futures-contracts-explained/
- https://fastercapital.com/topics/factors-affecting-futures-prices.html
- https://www.investopedia.com/terms/b/basis.asp
- https://www.ig.com/uk/trading-need-to-knows/what-are-derivatives
- https://www.schwab.com/learn/story/basics-trading-futures-contracts
- https://www.linkedin.com/pulse/9-out-10-traders-lose-money-fos-nilesh-sharma
- https://www.investopedia.com/terms/c/contractfordifferences.asp
- https://www.angelone.in/knowledge-center/futures-and-options/difference-between-options-and-futures
- https://www.binance.com/en-IN/square/post/920429
- https://www.ig.com/uk/trading-strategies/futures_vs-options--what-are-the-key-differences--210810
- https://www.investopedia.com/ask/answers/difference-between-options-and-futures/