Definition
Futures are nothing but futures contracts. A futures contract by definition itself is when a contract holder buys underlying assets on a specific date despite the asset’s market cost at that respective time. They thus decide on a price while purchasing the contract. The underlying asset can be any physical commodity such as oil or corn or similar financial instruments like stocks.
Options contracts are classified into two types- calls and puts.
>> Calls - Offer the contract holder the very choice to purchase an underlying asset at a determined rate by a specific date. Thus, they are not obligated to purchase these assets. >> Puts- offers the contract holder the choice to sell a respective underlying asset at a determined rate by a specific date. Again, the holder is not obligated to purchase the assets. The underlying asset is a financial instrument like a bond, stock, or futures contract.
Nature of the contracts
A futures contract is an agreement is entered into between a buyer and a seller where the buyer agrees to purchase the underlying at a specified time in the future for a fixed price. Thus, on the agreed expiry date, both parties are expected to fulfil their obligations and honor the contract. The buyer is expected to buy at the agreed price and the seller, to sell.
Nature of the contracts
An options contract gives the buyer the right to buy the asset at a fixed price. However, there is no obligation on the part of the buyer to buy- they have a right to exercise their option only if the conditions turn favorable.
Risk Associated
Both parties of the futures contract are expected to honor the contract even if the market moves against them In an options contract, the buyer has a privilege here. If the underlying moves in a direction unfavourable to them, the buyer can opt-out of buying it. This limits the loss incurred by the buyer.
Concept of premium
In a futures contract, there is no upfront cost when entering. The buyer in an options contract is supposed to pay a premium. The premium payment allows the options buyer the chance to not purchase the asset on a future date if it tends to become unattractive.
Profit / Loss
In a futures contract there’s no cap limit to the profits and losses In an options contract, there could be unlimited profits and losses, however, the losses can be trimmed if executed correctly.