The fundamental difference between options and futures lies in the obligations they put on their buyers and sellers. An option gives the buyer the right but not the obligation, to buy (or sell) a certain asset at a specified price at any time during the term of the contract. A futures contract gives the buyer the obligation to purchase a certain asset, and the seller to sell and deliver that asset at a certain future if a person will not be closed before the deadline.
[Futures can be great for indexes and commodities but the options preferred securities for shares. Options questions answers for beginners provides a great Introduction to options and how they can be used for hedging or speculation.]
In addition to commissions, the investor can enter into a futures contract with no upfront costs, while the purchasing options setup requires the payment of premiums. Compared to no initial costs of futures, the option shall be treated as payment for the right not to be compelled to buy the underlying in case of adverse shift in prices. The premium is the maximum an option buyer can lose.
Another Key difference between options and futures is the size of the underlying positions. As a rule, the basic positions are far more futures contracts and the obligation to buy or sell a certain quantity at a given price makes futures more risky for inexperienced investors.
As The Proceeds
The final major difference between these two financial instruments is a way of generating income participants. The winning option may be implemented in the following three ways: exercising the option when it is deep in the money, goes to the market and take the opposite position, or waiting until expiry and collecting the difference between the asset price and the strike price. On the contrary, the proceeds from the futures position will be automatically recalculated at market prices daily, meaning the change in the value of positions due to the futures accounts of the parties at the end of each trading day, but a futures contract holder can realize gains on the market and take the opposite position.
Options example of futures
Let’s look at the options and futures contracts on gold. One contract of gold on the Chicago Mercantile exchange (cme) has an underlying asset as one contract of COMEX gold futures, not gold itself. Investor want to buy an option can buy a call option for $2.60 per contract with a strike price of $1600 which expires in 2019 Feb.
The holder of this call has a bullish view on gold and has the right to assume the underlying gold futures positions until the option expires after the market close on February 22, 2019. If the price of gold will rise above the strike price of $1,600, the investor could exercise their right to get the contract, otherwise, he can give the contract options. The maximum loss of the owner of the option is $2.60 of premium that he paid for the contract.
The investor can make the decision to obtain a futures contract for gold. One futures contract has its own underlying asset in 100 Troy ounces of gold. The buyer is obliged to accept 100 Troy ounces of gold from the seller on the delivery date specified in the contract. If the trader is not interested in physical goods, he can sell the contract until the date of delivery or roll over to a new futures contract. If the price of gold goes up (or down) the amount of profit (or loss) revalued at market value (i.e. credited or debited) to the investor’s account at the end of each trading day. If the price of gold on the market falls below the contract price the buyer agreed, he is still obligated to pay the seller a higher price contract for the delivery date.
(To learn more about variations, see: the Basics of options. To learn more about futures, see futures Fundamentals.)