Futures and Options are both derivative contracts but they work quite differently. Here’s how the two compare.
Obligation
With futures, both the buyer and seller are obligated to honour the contract on expiry. With options, only the seller is obligated the buyer has the right to exercise the contract but is not forced to.
Risk
With futures, your profit and loss is unlimited on both sides, there is no cap on how much you can lose.
With options, if you are a buyer, your maximum loss is limited to the premium you paid. If you are a seller, your maximum profit is the premium you collect but your potential loss is unlimited.
Cost to enter
Futures require you to pay a margin to enter a position. Options buyers pay a premium upfront, which is usually much smaller. Options sellers need to maintain a margin since they carry unlimited risk.
How they behave as expiry approaches
A futures contract closely tracks the price of the underlying stock or index throughout its life. As expiry approaches, the futures price converges with the spot price.
An options contract behaves differently. Its value depends not just on the price of the underlying asset but also on how much time is left to expiry. As expiry gets closer, the time value of an option erodes this is called time decay. An option that is out of the money can lose most of its value simply because time is running out, even if the underlying price hasn’t moved much.
Quick comparison
| Futures | Options | |
| Obligation | Both buyer and seller | Only the seller |
| Max loss for buyer | Unlimited | Limited to premium |
| Cost to enter | Margin | Premium / Margin |
| Time decay | Does not apply | Applies |
Easy & quick
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