What are Futures and Options
In financial language, Futures and Options are two of the most common form of Derivatives. Derivatives are derived from an underlying, which could be a commodity or anything like wheat, shares, stocks, currency etc. Both futures and options are standardized agreements which are traded on an exchange. Most of us are often confused with these two terms, so let’s take a look into them and understand the underlying difference.
What are FUTURES?
You can buy and sell stocks or anything on an exchange or in a market. Prices go up and down every minute. This is called spot/cash market. However, FUTURE comes into picture when two parties agree to buy and sell something to each other on a particular price at a future date. For example, if you buy a future contract, it means that you promise to pay the price of the asset at a specified time.
What are OPTIONS?
OPTIONS are tools of trading entrusted to anyone in which you can make profits, but you don’t necessarily need to accept losses. The buyer of an Option has the right and no obligation to exercise a contract. Options with you could be a ‘call ‘or a ‘put’. The right to buy an underlying stock at a certain price is known as a ‘call’ option and same way the right to sell is called a ‘put’ option.
Difference between futures and options
Futures are pre-agreed contracts and parties are in obligation to square off the deal, whereas, options, on the other hand facilitates buyer the right to execute the transaction as per his/her wish. Both Futures and Options are standardized agreements which can take place at the stock exchange; however the difference lies in terms of obligations and leverages.
To put it in simple terms, FUTURES are pre-agreed contracts in which buyer must sell and seller must purchase at a specified time with no other choice of their own. OPTION is a right to exercise the contract at buyer’s convenience and wishes.