Difference between Future and Options Contract
As the name suggests in this article, we are going to discuss the difference between the future and the options contract. Apart from this, we are going to have a brief overlook on the importance of futures and options contract and their role in the functioning of the derivatives market also known as the stock market. The derivative market can be defined as a financial market that is based on the derivative instruments that can derive the value from the underlying value of the asset. There are mainly three contract categories under the market.
- Forward’s contract
- Future contract
The futures contract is defined as an agreement that is used to trade an underlying asset for the date in the upcoming future at a very predetermined price. This is quite an impressive option of the derivative market that is for sure. These are a sort of standardized contracts traded on the exchange that allow all the investors to make a sell or to buy. In other hands, the options contract is also a kind of standardized contract that is permitting the investor to trade any underlying asset on an already decided and confirmed price as well the date is also kind of fixed in such situations. The expiry date, however, is an option. Two options are available in this case known as the call options and the put options. Let’s see the difference one by one.
The most noticeable differences between the Future and Options contract:
The future contract can be defined as an agreement that is used for binding different counterparties to buy and sell a financial instrument at a very predetermined price and also a specific date in the future. While the options contract can be defined as a contract that allows all its investors the right to buy as well sell an instrument at a very accurate price this is, however, is allowed to be executed on or before the date of the expiry. The level of risk is quite high in the case of the futures contract. While the risk is kind of restricted to the premium amount as the payment in the case of the options contract. The buyer obligation in the future contract is of full obligation so that it can be executed altogether. Apart from this in the options contract, there is no obligation at all. The seller obligation is complete in the future contract. But if the buyer chooses the obligation of the option then the seller has to be abided by all this.
Now let’s see some of the similarities between the Future and Options contract. There are some similarities between both these contracts which keeps the basic intact:
- In both the exchange-traded derivatives that rely on the trading system of the stock market exchange that takes place around the globe.
- There is even the concept of daily settlement that takes place in both the contract.
- In here both the contacts are standardized with all the margin account being applicable.
- The underlying assets that are governing all these contracts are financial product such as all the currencies, commodities, bonds, stocks etc.
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The main differences between the future and the options contract:
- In case of a futures contract, there is no need for advance payment need to be done. This has been made the exceptional commission option. But in the case of an options contract, the amount is needed to be paid in form of the premium which is considered as the small percentage of the entire amount needed to be paid.
- In the extent of gain or loss, there is no restriction in case of the futures contract. As we consider the case of options contract there are unlimited profits but only limited loss countered most of the time.
- As far as we consider the date of execution the future contract happens on the pre-decided date. But this is not the style followed in the options contract.
- Time value of the money is not considered in a future contract. But when we talk about the options contract then its readily depend upon the time value of money.
While we considered all the options as either trading at a premium or discount offered by the market to all the investors. This, however, depends a lot on the underlying principle of the assert and this can never be fixed till the very ending. The higher premium is, however, creating quite a volatile market and even if the priced are a little expensive as compare to the normal once. Here the market is quite unpredictive and that is for sure.
As per the discussion that has taken place above both these contracts have their customizable option made available for the investors. So, it’s basically up to the investors to decide which one to go within the market. I hope the article was useful to all my readers out there.