The two standard derivative contracts traders use to manage risks and determine future price movements are future and options. These financial instruments provide traders and investors with specific benefits and traits that enable them to move swiftly and precisely through the market’s complexity. Stock market institutes in Kolkata can help understand how to use these two contracts for profit effectively.
While futures and options contracts share some similarities, they also fundamentally differ in structure, obligations, and potential outcomes. This article explores the difference between futures and options contracts, exploring their unique features and applications.
What Is a Future Contract?
A futures contract is a derivative used to purchase or trade an underlying asset (ETFs, stocks, commodities, etc.) at a specified price and quantity at a future date. All of these requirements are also outlined in the contract. In addition, no matter the market price, both the buyer and the seller are required to fulfill the contract.
The fact that futures contracts trade on a stock exchange makes them particularly liquid. Furthermore, the minimum deposit amount a trader must make in order to trade is specified by the stock exchange. As a result, this instrument’s main goal is to protect the asset’s price from market volatility.
What Is an Options Contract?
An options contract is a derivative agreement to purchase or sell the asset traded at an established price on or before a particular date (expiration date). The underlying security is what gives these contracts their value. Depending on the type of option purchased, the buyer can sell or acquire the underlying asset. Options are of two types and they include:
● Put option: The option holder has the authority to trade the asset at a fixed price.
● Call option: This bestows power to the holder to buy the underlying asset at an established price.
Differences between Future and Options Contract
These are some of the major differences between future and options contracts:
Features | Future | Options |
Risk | They are prone to increased risks. | They run a small amount of risk |
Obligation | The buyer must acquire the asset on the set future date when the contract is implemented..
| The buyer won’t be obligated to purchase the asset upon contract execution.
|
Profit or Loss | It could result in countless profits or losses
| Although it lessens the likelihood of suffering a potential loss, it could still bring you endless profit and loss.
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Advance Payment | You don’t need an up-front fee to sign it. Although, eventually you’ll be obligated to pay the expected price.
| Here, the buyer is required to pay a premium. This is what gives the buyer the choice to decide not to purchase the asset later on Incase it starts to lose its value. It should be noted that the premium paid is the sum that the options contract holder is intended to lose if he decides not to purchase the asset.
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Conclusion
Even though both futures and options contracts are crucial tools in the realm of financial derivatives, their frameworks and responsibilities differ. Futures contracts have clear obligations and the possibility of significant gains or losses, whilst options contracts give more flexibility but at a premium price. When you learn technical analysis in Kolkata and understand these differences, it will help you understand the complexities of these contracts and take advantage of your distinctive advantages to improve your investing strategies.
