What are the differences between Futures and Options
In India, the equity derivatives market is vast. Futures and options are the most important components of the Indian derivatives market. Both of them are completely contrary to one another. We’ll look at the differences between futures and options trading in this article. However, before you can understand the differences, you must first understand what they mean.
What does Futures trading mean and how does it work?
Future trading is a contract in which the buyer or seller agrees to purchase or sell shares at a set price in the future. The assets are traded at a predetermined price in futures trading. Future contracts, like stocks, are traded on exchanges and require a demat account to trade in. Stock futures, index futures, commodity futures, currency futures, and other forms of financial futures can all be traded.
What does Options Trading mean and how does it work?
Options trading is a contract that gives the trader the right, but not the responsibility, to sell or acquire assets at a specified price and for a specific period of time known as the expiry period. Calls and puts are the two types of option contracts. The holder of a call option contract has the opportunity to purchase the underlying asset at a certain price by a certain date. As a result, there is no need to acquire the asset. A put option contract holder, on the other hand, has the option to sell the underlying asset at a predetermined price by a particular date. The contract holder however is under no obligation to buy the assets.
Differences between Futures and Options Trading
- A futures contract requires the contract holder to assume ownership of the underlying asset at a defined price and date. The contract holder of an option contract has the right but not the obligation to acquire the underlying asset. Before the contract’s expiry date, the option contract holder can either trade or terminate the contract.
- In comparison to options trading, futures trading is extremely risky. When trading options, the maximum loss is limited to the premium amount paid.
- In a futures contract, there is no necessity for upfront payment. The activation of a futures contract, on the other hand, requires the payment of an upfront premium.
- There are no limits to losses or gains in futures trading. When it comes to options trading, however, the profits are high and the losses are little.
- In a futures contract, the price might go below zero. An option contract’s price can never go below zero.
Understanding the differences between futures and options trading is essential in making better stock market decisions. You can trade much more efficiently in the market if you understand how the derivatives markets work and how their prices change.