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.