Futures Vs. Options

Futures contracts require the transaction specified by the contract must take place on the date specified. Futures contracts are agreements to trade an underlying asset at a future date at a predetermined price. Both the buyer and the seller are obligated to transact on that date. Futures are standardized contracts traded on an exchange where they can be bought and sold by investors.

Options give the buyer of the contract the right, but not the obligation to execute the transaction. Options can be exercised at any time before they expire. There are two types of options: call and put options. Call options give the buyer a right, but not the obligation to buy the underlying asset at a predetermined price before the expiry date. A put option gives the option-buyer the right to sell the security.

Both options and futures contracts are standardized agreements that are traded on an exchange such as the NYSE or NASDAQ or the BSE or NSE. There is daily settlement for both options and futures, and a margin account with a broker is required to trade options or futures. Investors use these financial instruments to hedge their risk or to speculate. The underlying assets for both futures and options contracts can be stocks, bonds, currencies, or commodities.

One of the key differences between options and futures is that options are optional. The option contract itself may be bought and sold on the exchange, but the buyer of the option is never obligated to exercise the option. The seller of an option is obligated to complete the transaction if the buyer chooses to exercise at any time before the expiry date for the options.