How are options different from futures?

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Options and Futures are derivatives. Both are contracts and are derived from underlying instruments like Stocks, Currency, and Commodities etc.

A Future is a contract to buy or sell the underlying asset at a predetermined price and time. The buyer of a Future contract needs to honor the contract at the end. On the other hand, an Option is a contract that gives the holder the right to buy or sell the underlying asset at a predetermined price and time. The buyer of an Options contract may or may not be honored. Other differences between Futures and Options are-

  • In Futures, both the buyer and seller are obligated to honor the contract whereas, in Options, the seller only is obligated to honor the contract when the Option is exercised.
  • Futures require higher margin than Options.
  • Futures have unlimited loss potential whereas losses in Options are limited.
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More Options Trading Basics Questions...

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  2. What are the different types of options?
  3. What is the strike price of an option?
  4. What is the Expiration Day of Options?
  5. How do I trade options?
  6. What is the difference between futures and options?
  7. How is Nifty traded?
  8. What happens if an option expires out of the money?
  9. Is there any Margin payable in Options?
  10. How are the Options contracts settled?
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  12. What are Naked Options?
  13. What is an American Option?
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  15. What is In-The-Money (ITM), At-the-money-option (ATM) and Out-of-the-money-option (OTM) in Options?
  16. How to decide on whether should I buy or sell Call or Put options?
  17. Can I trade on options of any stock or Index?
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  24. What are the factors that affect the value of the premium of an Option?
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  26. How the premium paid on options is calculated?
  27. What are Option Greeks and its use in Option trading?
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  29. I have bought an option & paid the premium for it, how to settle it?
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  31. What is the contract cycle for Options in India?
  32. How does the probability of price movement affects the price of an option?
  33. What is the difference between trading stocks versus options?
  34. What is open interest and volume in options?
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  37. What is an option trade?
  38. Is binary options trading legal in India?
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