Futures and Options Difference is not known to many investors or traders. Basically, Futures and Options are the two types of derivatives. Normally there is a confusion among investors and traders between options and futures.
Let us understand FUTURES first. It is an agreement between 2 parties to buy or sell an asset at a certain time in future at a certain price. It can be closed on or before expiry. A trader buys futures if he is running short of funds. There is an obligation for both buyer and seller of futures contract to execute the contract at a certain date.
On the other hand, OPTIONS give right to the buyer, not an obligation but seller has obligation to comply with the contract. There are two types of options i.e. Call options and Put options. Call give the right to but and Put give the right to sell.
The profit and loss of futures buyer are unlimited. Whereas the loss of options buyer is limited whereas profit is unlimited. The margin requirement is HIGH in futures and low in options.
Futures are used by speculators and to tap arbitrage opportunities i.e. buy in cash and sell in futures at a higher rate. On the other hand, options are used for hedging. The seller of options pocket the premium upfront.
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