The main fundamental difference between
options and futures lies in the obligations they put on their buyers and
sellers.
- An option gives the buyer the right, but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract.
- A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date, unless the holder's position is closed prior to expiration.Futures may be great for index and commodities trading, but options are the preferred securities for equities.
Aside from commissions, an investor can
enter into a futures contract with no upfront cost whereas buying an options
position does require the payment of a premium. Compared to the absence of
upfront costs of futures, the option premium can be seen as the fee paid for
the privilege of not being obligated to buy the underlying in the event of an
adverse shift in prices. The premium is the maximum that a purchaser of an
option can lose.
Another key difference between options and
futures is the size of the underlying position. Generally, the underlying
position is much larger for futures contracts, and the obligation to buy or
sell this certain amount at a given price makes futures more risky for the
inexperienced investor.
The final major difference between these
two financial instruments is the way the gains are received by the parties. The
gain on a option can be realised in the following three ways: exercising the
option when it is deep in the money, going to the market and taking the
opposite position, or waiting until expiry and collecting the difference
between the asset price and the strike price. In contrast, gains on futures
positions are automatically 'marked to market' daily, meaning the change in the
value of the positions is attributed to the futures accounts of the parties at
the end of every trading day - but a futures contract holder can realize gains
also by going to the market and taking the opposite position.
Forward contracts and call options are
different financial instruments that allow two parties to purchase or sell
assets at specified prices on future dates. Forward contracts and call options
can be used to hedge assets or speculate on the future prices of assets.
A call option gives the buy or holder the
right, but not the obligation, to buy an asset at a predetermined price on or
before a predetermined date, in the case of an American call option. The seller
or writer of the call option is obligated to sell shares to the buyer if the
buyer exercises his option or if the option expires in the money.
The quick answer is yes and no. It all
depends on where the option is traded. An option contract is an agreement
between the buyer and the seller of the contract to buy or sell an underlying
asset at a certain price, amount and time. These are referred to as the strike
price, the contract size and the expiration date, respectively. Options are
sold in two places: on option exchanges and over the counter.
Option exchanges are similar to stock
exchanges in that trade happens through a regulated organisation, such as the
Chicago Board Option Exchange ( CBOE ). Exchange-traded options at the basic
level are standardised; this means that each option has a set standard
underlying asset, quantity per contract, price scale and expiration date.
(FLEX) allow for customisation of the contract specifics of exchange-traded
options; they are most often written by a clearing house. There are also
exchange-specified rules that must be followed when creating a FLEX option.
