Content
Introduction
Options and Futures are both recognised as financial instruments used by distinguishing investors to profit upon or even hedge against the price alterations of commodities and similar investments. The prime difference between options and futures is that futures need the contract holder to purchase the underlying assets such as commodities or stocks on a respective date in the near future. Option chain, on the other hand, offer the contract holder the choice or option of executing the contract. This difference plays a quintessential role in influencing how futures and options are invested and priced and how traders can benefit from them to gain profits.
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Futures Vs Options
Futures
1) Contract holders must take complete ownership of the respective underlying asset.
The present market price determines the price of future investments.
2) Price may fall under $0.
3) Futures have comparatively lesser price changes.
Options
1) Contract holders have a choice and are not obligated to buy the underlying asset.
The price of the future investments is predetermined in the contract.
2) Price cannot fall under $0.
3) The value of options in stocks decreases swirly over time and alters much more prominently with alterations in the value of the underlying asset.
Understanding Futures
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.
Futures contracts make use of a rather standardised amount for every underlying asset. When buying futures contracts, you won’t have to stake the complete value of the contract. On the contrary, you will have a hold on a significantly small percentage of the money required for the investment, known as the initial margin payment. The value of the contract, moreover, will fluctuate. Furthermore, if you encounter a big loss, your broker might ask you to deposit money. A majority of commodity traders tend to shut down a position before its expiration. When selling a futures contract, you may gain sufficient funds for covering the margin loan, which may hopefully bring you some profits.
Understanding Options
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. Thus, a standard stock option is associated with 100 shares of the respective underlying stock. Both options trading and futures trading make use of the same standard units for commodities futures.
Investing in a call option is more or less a bet that the respective underlying assets acknowledge the value before the expiration of the contract. A put option, on the other hand, is also a bet that it may or may not reduce in price. Thus, essential expertise is very important for making successful investments.
Bottom Line
Analysing the prime differences in futures and options and how they are purchased and sold play an indispensable role in helping investors make much more informed and well-versed decisions. That was everything you needed to know about options and futures.
