What is the difference between options and futures?

01:13 Mins Read

There are some subtle differences between futures and options. Getting to know them can make F&O trading easier.

Transcript

What is the difference between options and futures? The main point of difference lies in the obligation of the buyer and the seller. In a futures contract, both the buyer and the seller of the contract are obligated to complete the transaction. However, in an options contract, the buyer of the contract has the right, and not the obligation, to execute the contract. What about the risk involved? The risk involved in a futures contract is higher than the risk in an options contract. Why is that so? Well, that’s because of the degree of the profit or loss possible. In a futures contract, there’s unlimited potential for both profit or loss. In an options contract, the potential for profit is unlimited, but the loss is limited to the premium paid. To learn more about the profit and loss in an options contract, you’ll need to know how to calculate the related payoffs. Continue with smart money to find out more.