Difference Between Options and Futures

Options and futures are derivatives contracts that allow traders to speculate on underlying asset prices. While both give traders exposure to price movements of the underlying without actually owning it, there are important differences between options and futures. In this article, we will explain the key difference between options and futures - what they are, how they work and their unique pros and cons.

Why Understanding the Difference Between Options and Futures is Important?

Understanding the difference between options and futures is vital because they are two different types of derivatives. There are a few key reasons why understanding the difference between options and futures is essential:

So in short, options and futures are distinct types of derivative contracts with different risk profiles, specifications, strategies, and regulations. Understanding the key differences between them is important to properly evaluate which instrument is better suited for your investment or hedging needs.

Difference Between Options and Futures

Options	Futures
Options grant the owner the privilege, but not the duty, to purchase or sell an underlying security or asset at a predetermined price	Futures are contracts that obligate the holder to buy or sell an underlying asset at a specified price on a certain date.
Options have two types: call options and put options.	Futures have only one type.
Options are more flexible and customizable than futures.	Futures are more standardized and regulated than options.
Options can be exercised anytime before expiration (American style) or only at expiration (European style).	Futures can be settled by delivery of the underlying asset or by cash settlement at expiration.
Options have a premium that is paid by the buyer and received by the seller.	Futures have no upfront payment but require a margin deposit by both parties.
Options have limited risk for buyers and unlimited risk for sellers.	Futures have an unlimited risk for both buyers and sellers.
Options have unlimited profit potential for buyers and limited profit potential for sellers.	Futures have unlimited profit potential for both buyers and sellers.
Options are affected by time decay, which reduces their value as expiration approaches.	Futures are not affected by time decay but by changes in the underlying asset price.
Options are more suitable for hedging and speculation than futures.	Futures are more suitable for arbitrage and price discovery than options.
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.
Options have higher transaction costs and commissions than futures.	Futures have lower transaction costs and commissions than options.
Options can be used to create complex strategies with multiple legs.	Futures can be used to create simple strategies with one or two legs.
Options are more sensitive to changes in volatility than futures.	Futures are more sensitive to changes in interest rates than options.
Options can be based on stocks, indices, commodities, currencies, etc.	Futures are often based on commodities but also on stocks, indices, currencies, etc.
Options have a strike price, which is the predetermined price at which the contract can be exercised	Futures have a delivery price, which is the agreed price at which the contract will be settled at expiration
Options have an intrinsic value, which is the difference between the underlying asset price and the strike price if it is positive	Futures have no intrinsic value but only a market value, which is determined by the supply and demand of the contract
Options have an extrinsic value, which is the difference between the option premium and the intrinsic value, if any	Futures have no extrinsic value but only a fair value, which is based on the cost of carry of the underlying asset
Options can be classified as in-the-money, at-the-money, or out-of-the-money, depending on the relationship between the underlying asset price and the strike price	Futures can be classified as in backwardation or contango depending on the relationship between the spot price and the future price of the underlying asset

Difference Between Future and Options (Time-Based)

Type		Market	Trading Time	Contract Cycle	Expiration Date	Settlement Mode
Options	Equity Options	NSE/BSE	9:15 a.m. to 3:30 p.m.	Three-month contracts	Last Thursday of every month	Cash or delivery
	Currency Options	NSE/BSE	9:00 a.m. to 5:00 p.m.	Three-month contracts	Two working days before the last working day of every month	Cash
	Commodity Options	MCX	10:00 a.m. to 11:30 p.m./11:55 p.m.*	Different contract cycles depending on the underlying commodity	Three days before the first day of the delivery month	Cash or delivery
Futures	Equity Futures	NSE/BSE	9:15 a.m. to 3:30 p.m.	Three-month contracts	Last Thursday of every month	Cash or delivery
	Currency Futures	NSE/BSE	9:00 a.m. to 5:00 p.m.	Twelve-month contracts	Two working days before the last working day of every month	Cash
	Commodity Futures	MCX	10:00 a.m. to 11:30 p.m./11:55 p.m.*	Different contract cycles depending on the underlying commodity	A specific date of every month	Cash or delivery

Futures vs Options: Which is Better for You? In-Depth Analysis

Futures and Options have different characteristics, risks, and rewards that investors should understand before choosing which is better. The main difference between futures and options is that futures oblige the buyer and the seller to execute the contract at a specified price and date, while options give the buyer the right but not the obligation to do so. This means that futures have higher risk, lower flexibility than options, lower transaction costs, and higher liquidity.

To illustrate these differences, let’s look at the example of futures and options trades:
Example: An investor expects the price of ABC stock to rise from ₹100 to ₹120 in three months. He can either buy a three-month futures contract for 100 shares of ABC at ₹100 per share or buy a three-month call option for 100 shares of ABC with a strike price of ₹100 and a premium of ₹5 per share.

This example shows that futures and options have different risk-reward profiles that suit different types of investors and market scenarios. Futures are better for investors who have a strong conviction about the direction and magnitude of the price movement and are willing to take on more risk and less flexibility. Options are better for investors with a moderate or uncertain outlook about the price movement and looking for more flexibility and less risk.

Conclusion

In this article, we covered the key differences between options and futures contracts. We discussed what each type of derivative is, how they work, and their unique benefits and risks. With this information, you should now be able to decide which contract suits your investing objectives, risk appetite and market outlook - options or futures.

Whichever you choose, it is important to trade through a reputable and reliable broker. That’s why we recommend Samco as your preferred broker for trading options and futures. You can open a free account with Samco today and start trading with ease and convenience. Click here to sign up with Samco and start your journey to financial freedom.

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