Futures and Options are two frequently used terms in financial markets. Here are the key differences between the two to help you choose the right derivative tool for your investments.
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Nature of Contract
In Futures, it is obligatory to buy/sell at a future date. Meanwhile, an Options buyer has the right to buy/sell.
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Both Futures and Options have a standardised agreement.
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In Futures, it is necessary to fulfil contract obligations. Meanwhile, Options holder can choose to exercise.
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Rights and Obligations
Both buyer and seller have obligations in Futures whereas in Options the buyer has the right and the seller has the obligation.
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There is unlimited profit and loss potential in Futures whereas an Options holder has limited risk and unlimited profit potential.
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Price Movement Impact
In Futures there is a direct correlation with underlying, meanwhile, in Options there is a non-linear relationship due to pricing.
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Market Participation
In Futures there is speculation or hedging. In Options there is speculation, hedging and income generation.
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Initial Investment
Margin requirements apply in Futures whereas the premium is paid upfront in Options.
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Futures see daily settlement whereas Options settlement is exercised or expires at the expiration date.
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Futures include commodities, stocks and indices; Options include equity options, index options and commodities.
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There is less flexibility in Futures due to obligation as compared to Options where there is more flexibility as it’s a right.
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The major purpose of Futures is hedging against price fluctuations whereas that of Options is hedging, speculation and income generation.
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