Stock Market |
November 28Difference between option and future trading ?
Derivatives are financial
instruments which derive their value from underlying assets such as equity
shares, commodities, currencies, and interest rates.
Futures and options are the two
most commonly traded derivatives. Market volatility also plays a significant
role in the trading of futures and options.It is imperative to understand the difference between options and futures to
enable a better understanding of the derivatives. Here we mention below the major differences.
Definition
· Future - A binding agreement between two
parties to buy or sell an asset at a certain time in the future at a
pre-determined price is a future contract.
· Option - A non-binding contract in which an investor
gets the option or right to buy or sell a financial instrument on or before a
certain date in the future at a pre-determined price is an option.
Degree of
Risk
· Future - In the case of
futures, there is a higher degree of risk as the parties are under obligation
to execute their part of the contract at the pre-determined price, even in the
case of losses.
· Option - In the case
of options, there is a lower degree of risk as compared to futures as the
parties are under no obligation and the level of risk is restricted to the
premium amount.
Scope of
Profit
· Future - There is an
unlimited scope of profit in futures and the potential of losses is also
higher.
· Option - Options also
provide an unlimited scope of profit but restrict the extent of losses.
Premium
· Future - You don’t have to
pay any advance amount in the case of futures except a commission.
· Option - In the case of
options, an investor needs to pay the premium amount before they enter into the
contract.