Q: What is the difference between options and futures?

A: The primary difference lies in the obligations. Both sides of a futures contract have settlement obligations, with physical delivery or cash settlement depending on the product. A long and short future have opposite price exposure, but their practical risks and price bounds are not necessarily identical.

In a futures contract, both participants in the contract are obliged to buy (or sell) the underlying asset at the specified price on settlement day. As a result, both buyers and sellers of futures contracts face the same amount of risk.

An option buyer pays a premium for a right rather than an obligation to exercise. The premium can contain intrinsic and time value. A standalone purchased option can lose the premium and costs; exercise can create a separate stock, futures or cash obligation.

An option seller receives a premium and accepts the assignment obligation. A standalone short call on stock can have unlimited loss; a short put has substantial but finite loss if the stock falls to zero. Volatility, time, price movement and contract terms all affect exposure. Futures also require margin and can lose more than the initial collateral.

More Frequently Asked Questions

  1. What are the differences between standardized options and employee stock options?
  2. I recently bought a call option. Since then, the stock price has risen and so has the call option. I wish to sell my call option for a profit but am I obligated to deliver the underlying stock if the option buyer decides to exercise his call option?
  3. Does an increase in open interest imply a bullish sentiment?
  4. I own options on a stock that has just declared a 2 for 1 stock split. What happens to my options?
  5. Why do some stocks have options for trading while others don't?
  6. Can i be assigned if I buy-to-close a short position?

Profit limits depend on the payoff. A stock call’s upside is theoretically unlimited, while a put on a nonnegative stock has finite maximum profit at zero. Premium-limited loss is not a claim that every option strategy has limited risk.