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Investors utilize futures and options as trading tools on the stock market. They offer the chance to make enormous profits because they are financial agreements between the buyer and the seller of an asset. Futures and options do differ in some significant ways, though.
Obligation:
An agreement between two parties to buy or sell an asset at a specific price and time in the future is known as a futures contract. The buyer is required in this case to purchase the asset on the specified future date.
The right to purchase the asset at a set price is provided by an options contract. On the other hand, the buyer is not required to complete the transaction.
Risk:
Even if the security moves against them, the futures contract holder is obligated to buy on the future date. Imagine that the asset’s market worth is less than the contract’s price. Even yet, the buyer will be forced to purchase it at the earlier agreed-upon price, incurring losses.
In an options contract, the buyer is in a better position. The buyer has the option to reject the purchase if the asset’s value drops below the fixed price. As a result, the buyer’s loss is lessened.
In other words, the potential gain or loss from a futures contract is limitless. An options contract, however, lowers the likelihood of loss while still allowing for unlimited profit.
There is no up-front money required to enter a futures contract. However, the buyer is required to eventually pay the agreed-upon amount for the item.
In an options contract, the buyer is required to pay a premium. By paying this premium, the options buyer is given the right to choose not to purchase the asset in the event that it becomes less appealing in the future. The premium paid is the amount the options contract holder stands to lose should he decide not to purchase the asset
We might need to pay some commissions in both situations.
Execution of a contract:
A futures contract is put into effect on the specified date. The buyer buys the underlying asset on this date.
In the meantime, the buyer of an options contract is free to execute the agreement at any time before the expiration date. Therefore, we are free to purchase the asset whenever we deem the circumstances appropriate.
