Financial derivatives are categorized into forward contracts, futures contracts, options and swaps. Futures can be understood as legal binding of trade at a future date at an agreed price. On the other hand options are investors have the right to buy or sell products in stipulated time at pre specified price.
Future contract is the contract between involved parties to buy or sell financial assets at a set price at a future agreed date. Key elements in future contracts are date, buyer, seller and price.
These are transferable and standardized contracts. These are traded in NYSE/NASDAQ/BASE/NSE. It includes currencies, stocks, commodities etc. generally in these contracts seller will look for price to fall and buyer will look for price to rise.
In this, the holder has the right to buy or sell his/her securities at a certain price on or before a stipulated date. Strike price is the predetermined price on which trading is concluded.
Premium is the non-refundable upfront cost by which an investor will get an option to purchase. Put option (sell asset) and call option (buy asset). In both cases the buyer holds the right to exercise the option to buy or not.
Both are traded derivative contracts and traded on BSE or NSE. Assets covered in both are currencies, commodities, stock etc.
The major differences between future contract and option contract are as follows −
|Sr.No||Future contract||Option contract|
|1||Binding agreement for buying and selling financial instruments on specific future dates at predetermined prices.||Investors can buy or sell financial instruments on or before a specific date at a set price.|
|2||There is an obligation to the buyer.||No obligation to the buyer.|
|3||Contract is executed on an agreed date.||Contract can be executed any time before the agreed date.|
|4||High risk is involved.||Risk is limited.|
|5||No need for advance payment.||Advance is paid (in premiums).|
|6||Unlimited loss and unlimited profit.||Unlimited profit and limited loss.|