Similarities and Differences of Options and Futures


New traders may often come across the terms options and futures which often seem like synonymous concepts in trading. However, they have to be able to discern that there are similarities as there are differences in these two trading concepts which they can use to their advantage. Options and futures are considered are derivatives which mean that when taken alone, they do not really have any value but traders get its worth from the instrument of which they are based upon. Traders who engage in this type of trading basically get into agreements or contracts. However, there are differences in the terms that are stated in the contracts.

Buyers of futures contracts have the obligation to pay for the underlying asset while the sellers are expected to deliver at a date as agreed upon. However, the holders of futures contracts may liquidate their position before the expiration date rendering the delivery option void. On the other hand, buyers in options contracts are given the right but they may not exercise their option to sell and deliver upon expiration. Another difference between the two concepts is the cost that is involved.

Traders may not spend so much when entering futures contracts as they may only pay for small amount or at least 10% of the value of the underlying asset. Those who get into options contracts will have to pay for the premium although the risks that traders are taking are actually lower in this type of agreement. There are only a few options contract holders that actually deliver the underlying asset such bond certificates, shares of stocks or commodities. Another difference between the two lies in the way traders realize their profit or incur their losses.

Traders who are into call options may purchase and exercise their options immediately. They may be able to do this if the underlying asset is sold or is bought through options that are offered with a price that is lower than the present market price. Traders who are into futures contract may see the value of their positions at the end of the trading day. Holders of these contracts may gain or loss on paper only. However, they may experience the reality of losing profit once they reach the expiration date and the only recourse left is to liquidate it.

Traders face some degree of risks whether they are into futures or options trading but they can lessen it if they know how to make use of the leverage that these trading activities provide.

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