Futures and Options trading goes hand in hand so if we are discussing about options there bound to be a discussion on futures. Although they both are similar from some dimensions still they do have some very striking differences that a trader should consider before he/she starts trading in them. Futures and Options are broadly known as derivatives and this is because they are extensions of the underlying asset and not an asset by themselves. Their value is derived from the market movements in the value of the underlying asset.

In the previous blogs we have seen that Options contract gives the owner a right to either buy (for call option) or sell (for put option) the underlying asset at a predefined price before the contract end date, however owner of the contract is not obligated to exercise his/her rights. On the contrary, in a futures contract buyer is obligated to purchase the asset at a predefined price at the contract end date, in the same manner seller is obligated to sell the asset at a predefined price at the contract end date.

In the futures contract traders are actually investing in the whole value of an asset at a future date where as in case of options contract it has an expense associated with it which is called ‘premium’. So if a trader wants to buy an asset then he can purchase a futures contract where he is investing in actual value of asset with no other cost, while in case of options if a trader exercises his/her rights then they are supposed to pay value of the asset plus the premium (cost). In case of futures, if the current market value is not in favor of current position even then a trader would be obligated to buy or sell the underlying asset, where as with options a trader can forget about the premium paid and not exercise his right to either buy or sell.

One important difference between futures and options is also in the way one can make profit. In case of call option if a trader can see a price difference between the current market price and option premium plus the strike price then they can take advantage of the situation and make money immediately. Whereas returns out of futures are ‘marked to market’ every day which means changes in the value of investment will be accounted to parties in contract at the end of the trading session.

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