Future and options both are basic type of derivatives. Both can be used hedging instruments. Still, there are some difference between both, elaborated as below:
- The futures involves obligation while the options involve right. In futures, the obligation must be fulfilled by the both parties, but in case of options only one party has obligation to perform the contract. The option holder has the right to exercise or not to exercise his option. When, he decides to exercise his option, the option writer must fulfill his obligation.
- In futures, there is no premium payable to buy the contract. But in case of options, the option-holder has to pay a premium to buy the option.
- The profit or loss of the parties depend upon the specified price and the actual price on the settlement day under futures. Hence, both parties are exposed to unlimited profit or loss. However, in case of options, the loss of the option holder is limited to the premium paid, but his gains are not limited. Similarly, the profit of the option writer is limited to the premium received, but he is exposed to unlimited risk.
- Normally, the maturity period of futures is longer than that of the options.