Differences between Options and Futures

Here is a comparison of some of the main differences between options and futures:

Basis of DifferenceOptionsFutures
1. MeaningOptions confer the right but not the obligation on buyers to buy or sell foreign currencies.Futures oblige buyers to buy or sell” foreign currencies (unless the contract has been sold prior to maturity).
2. Obligation to ContractOne party to an option contract is not obligated to transact at a later date. Specifically, the option buyer has the right but not the obligation to perform. The option writer (seller) though, does have the obligation to perform, if the buyer of the option insists on exercising it.In the case of a futures contract, both buyer and seller are obligated to perform.
3. ConsiderationAn option buyer pays the seller an option price.A futures buyer does not pay the seller to accept the obligation.
4. MaturityOptions (American) may be exercised at any time up to the specified maturity date.Futures are fulfilled only on specified maturity dates.
5. Contract DeliveryOptions buyers may take a receipt or make delivery of currencies (spot) at any time up to the option’s maturity.Futures buyers take a receipt or make delivery of currencies at the expiry of the three, six, or nine months maturity date (unless the contract has been resold prior to its maturity).
6. Margin RequirementOptions, which are paid for at the outset of the contract, do not attract margin requirements.Futures attract margin requirements (security deposits).
7. RiskInvestors can use options to protect against asymmetric risk.Investors can use futures to protect against symmetric risk.
8. VersatilityOptions trading is a lot more versatile than futures trading as the unique combination of call options and put options along with the premium on each contract made it possible for options strategies that profit in all directions.Apart from arbitraging, futures trading is basically single-directional (you make money only when the price moves in one direction).

Leave a Comment

Share to...