Difference between Options and Futures

Abstract:

The expression ‘financial derivative’ suggests options, swaps, any hybrid asset or futures that have no autonomous worth or value; for example, its worth or value depends on the fundamental or underlying commodities, currencies, securities, and so forth. In this specific situation, options and futures are frequently misjudged by many individuals. Futures might be perceived as the legitimately authoritative or legally binding agreement to exchange or trade the underlying monetary resource of normalised or standardised quantity and quality, at a concurred cost, at a future determined date.

Alternately, an options contract is depicted as a decision in possession of the financial backer or the investor, for example, the option or right to execute the agreement of trading a specific monetary item at a pre-determined cost, before the expiry of the specified time.

Meaning of Option Contracts:

An exchange-traded derivative where the holder of the monetary resource has the privilege to trade securities at a specific cost, prior to a specified date is viewed as an option. The foreordained cost on which the exchange or trade is closed is known as the strike price. The option can be bought by paying a forthright expense or cost, which is non-refundable in nature, known as premium.

The option to purchase the hidden resource or underlying asset is known as a call option, while the choice or option to sell the resource or asset is a put option. In the two cases, the right of practising the option lies with the purchaser, yet he isn’t committed to doing as such.

Meaning of Futures Contracts:

Future is characterised as an agreement between two people of parties, seller and the buyer, where both the parties guarantee to one another trading of the monetary resource or a financial asset at a concurred date later on and at a set cost. As the agreement is lawfully restricting or legally binding, the parties to it should perform it by handing over cash or stock sequentially.

The futures contract is a transferable and standardised agreement that spins around, and its four key components are price, buyer, seller, and transaction date. The products that are exchanged on the stock exchange like BSE, NSE, and NYSE or NASDAQ in the future contract incorporate commodities, stocks, other financial assets, and currencies. In such agreements, the seller anticipates that it should fall while the purchaser or the buyer anticipates that the resource cost should ascend or increase.

Difference Between Options and Futures:

OPTIONS CONTRACTS

FUTURES CONTRACTS

Meaning

Options are the agreement or contracts wherein the financial backer or investor gets the option or right to trade the monetary instrument at a set cost prior to a specific date; in any case, the financial backer isn’t committed to doing as such.

A futures contract is an official understanding or agreement for the trading of a monetary instrument at a foreordained cost at a future determined date.

Risk

They are subjected to limited risk.

They are subjected to high risk.

Level of Profit or Loss

It can reap either unlimited profit or loss

It can also reap unlimited profit or loss

Buyers Obligation

The buyer has no obligation.

The buyer has an obligation to execute the contract.

Contract Execution

The contract can be executed anytime before the expiry of the agreed date.

The contract can be executed on the agreed date.

Advance Payment

Advance is paid in the form of premiums.

No advance payments are made.

Conclusion:

One might say that nothing remains to be befuddled between the options and futures. As the name recommends, options accompany a choice (decision) while futures doesn’t have any choice; however, their exhibition or options and execution are sure.

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