In the commodities market, futures contracts (futures) and futures options (options) are two ways to trade.
Futures contracts need you to buy or sell the commodity, whereas futures options allow you the right to buy or purchase the futures contract without having to do so.
But before going through the difference between futures and options, let us first understand futures and options.
Understanding Options and Futures
Options and futures contracts are both standardized agreements traded on an exchange such as the NYSE, NASDAQ, BSE, or NSE.
A futures contract only allows trading of the underlying asset on the date specified in the contract, whereas options can be exercised at any time before they expire.
Both options and futures have a daily settlement, and trading options or futures require a margin account with a broker. These financial instruments are used by investors to mitigate risk or speculate (their price can be highly volatile). Stocks, bonds, currencies, and commodities can all be used as underlying assets for futures and options contracts.
Options vs Futures - Which is Better?
The detailed difference between options and futures are listed below in the table-
Particulars | Futures | Options |
Meaning | Futures contracts are contracts to trade an underlying asset at a predetermined price at a future date. The buyer and seller are both bound to complete the transaction on that date. Futures are standardized contracts that can be bought and sold on an exchange by investors. | Options contracts are standardized contracts that allow investors to trade an underlying asset at a predetermined price before a specific date (the expiry date for the options). Call and put options are the two types of options available. The buyer of a call option has the right (but not the responsibility) to purchase the underlying asset at a predetermined price before the expiration date, whereas the buyer of a put option has the right to sell the security. |
Risk | They are subject to higher risks. | They are subject to limited risk. |
Profit or Loss | It could reap unlimited profit and loss. | It could again bring you unlimited profit and loss, although it reduces the chances of incurring a potential loss. |
Obligation | The buyer is obliged to buy the asset on the certain stated future date. | In this, the buyer will have no obligation to buy or execute the contract. |
Contract Execution | A futures contract is executed on the date agreed upon. On this certain date, the buyer buys the underlying asset. | Options contracts can be executed by the buyer anytime before the expiry date. Hence, an individual is open to buying the asset whenever the conditions seem correct. |
Advance Payment | In a futures contract, there is no upfront cost when entering. Although, the buyer is supposed to pay the agreed price for the asset ultimately. | The buyer in an options contract is supposed to pay a premium. The premium payment allows the options buyer the chance to not purchase the asset on a future date if it tends to become unattractive. Note that if the options contract holder opts not to buy the asset, the premium paid is the amount he is supposed to lose. |
What is the Difference Between Options and Futures Based on Liquidity?
Futures contracts are the purest commodity derivative. They are as near to trading the actual commodity as you can go without actually trading one.
These contracts have a higher degree of liquidity than options contracts. As a result, futures contracts are more suitable for day trading.
Futures and Options Difference Based on Value
Futures contracts move faster than options contracts because options move in tandem with futures contracts.
For at-the-money options, this sum may be 50%, while for deep out-of-the-money options, it could be only 10%. You don't have to be concerned about the constant option value degradation that can occur over time.
Options vs Futures Difference Based on Capital
When it comes to capital value, futures options are considered to be risky. In other words, the worth of options diminishes with each passing day. This is known as time decay, and it increases as options approach expiration.
Thus, we can say that Futures and Options - both are exchange-traded derivative contracts that are traded on the stock exchanges such as - the Bombay Stock Exchange or the National Stock Exchange.
It is important to futures and options difference to use these trading tools in the best possible manner. The underlying asset covered by them are the financial products like commodities, currencies, bonds, stocks, and more.
FAQs
The main difference between futures and options trading is that futures are a contract that obligates the buyer to purchase or sell an asset at a specified future date and price, while options give the buyer the right, but not the obligation, to purchase or sell an asset at a specified price and date.
Which is better futures or options? ›
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.
What is futures and options with examples? ›
Futures and options are the major types of stock derivatives trading in a share market. These are contracts signed by two parties for trading a stock asset at a predetermined price on a later date. Such contracts try to hedge market risks involved in stock market trading by locking in the price beforehand.
What is the difference between options and futures for dummies? ›
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.
What is one difference between futures and options contracts? ›
A futures contract only allows trading of the underlying asset on the date specified in the contract, whereas options can be exercised at any time before they expire. Both options and futures have a daily settlement, and trading options or futures require a margin account with a broker.
Why do people prefer futures over options? ›
The simplicity of futures makes them attractive, especially for individuals who are new to derivatives trading. Traders can easily understand the terms of the contract, such as the contract size, expiration date, and delivery conditions. Options, on the other hand, can be more complex.
Why do people buy futures instead of options? ›
Futures offer higher potential profits but also higher risk, while options provide limited profit potential with capped losses. However, Options require lower upfront capital compared to futures.
Which trading is best for beginners? ›
Overview: Swing trading is an excellent starting point for beginners. It strikes a balance between the fast-paced day trading and long-term investing.
What is a real life example of futures? ›
Futures contract example
For example, Crude Oil is currently selling at $60 a barrel, and a futures contract for $65 per barrel is available for three months' time. As you believe the price of WTI will rise beyond $65 by the time of expiry, you buy the contract. The market actually rises to $75.
What are futures and options for beginners? ›
Futures are an obligation for both the buyer and seller, where they have to trade at a pre-established value of the underlying asset. In contrast, Options are not obligations, but a right of the buyer, where they can trade at a pre-established price of the underlying security.
Here are seven tips for how to proceed.
- Establish a trade plan. The first tip simply can't be emphasized enough: Plan your trades carefully before you establish a position. ...
- Protect your positions. ...
- Narrow your focus, but not too much. ...
- Pace your trading. ...
- Think long—and short. ...
- Learn from margin calls. ...
- Be patient.
Buying options means limited risk, but you rarely make money. Many small F&O traders prefer to buy options as their risk is limited to the premium paid. Option sellers take more risks and earn more than option buyers more often. However, it is prudent to remember that there is limited risk when buying options.
Is trading futures harder than options? ›
Even slight shifts that take place in the price of an underlying asset affect trading, more than that while trading in options. While both have the same degree of leverage and capital committed, volatility makes futures the riskier of the two. You must understand that leverage can be akin to a “double-edged sword”.
What is an example of options trading? ›
Options Trading Example
Suppose, you purchase a long call option for 100 shares of Company X at ₹110 per share for December 1. You'd be entitled to purchase 100 shares at ₹110 per share regardless of the actual price of the share is on December 1.
How much money needed to trade futures? ›
To apply for futures trading approval, your account must have: Margin approval (check your margin approval) An account minimum of $1,500 (required for margin accounts.) A minimum net liquidation value (NLV) of $25,000 to trade futures in an IRA.
Are options more expensive than futures? ›
1 you would see that you held an unprofitable position and simply allow the contract to expire without exercising it. However, this makes options contracts significantly more expensive than futures.
Which is more profitable futures or options or stocks? ›
Options generally are a higher-risk, higher-reward opportunity than stocks. Investors considering them should know all their benefits and drawbacks.
What's riskier options or futures? ›
Where futures and options are concerned, your level of tolerance of risk may be a contributing variable, but it's a given that futures are more risky than options. Even slight shifts that take place in the price of an underlying asset affect trading, more than that while trading in options.
Which is better equity or futures or options? ›
What is better for returns, stocks or futures and options? The answer rests with you, the individual investor. Stocks may be a good bet when you want experience in the markets. Although investing in the share market today requires work and analysis, investing in futures and options requires even more of this.
