What is the difference between futures and options?

Definition

Futures contracts are legal agreements between two parties to buy or sell an underlying asset at a specific price on a future date. In this type of contract, both parties are obliged to fulfil the terms of the agreement.

An option contract gives the holder the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset within a certain period at a predetermined price. The seller of the option must fulfill the contract if the option holder decides to exercise the option.

Obligation

Both parties are obliged to buy or sell the underlying asset at the agreed price and date.

The holder of the option contract has the freedom to decide whether or not to buy or sell the underlying asset at the fixed price.

Risk

Both parties involved in a futures contract are exposed to risk because they are exposed to market movements.

The risk is limited, as the holder can at most lose the premium paid for the contract.

Pricing

Prices are determined by the current market price of the underlying asset, the delivery date and other factors. According to the "mark-to-market" principle, profits and losses are offset daily in the event of fluctuating market prices.

The price of an option contract, known as the premium, is influenced by the current market price of the underlying asset, the strike price, the time remaining until expiration, the implied volatility and other factors.

Execution of a Contract

The contract is executed on the date fixed in advance.

The buyer of an option contract has the option to exercise it before the contract period expires.