How are Options different from Futures Contracts?
Options are different from futures in several interesting senses. Some of these differences are listed below: • Right vs Obligation: In case of Futures contract, both the buyer and seller are obligated to buy/sell the underlying asset. In case of options contract, the buyer enjoys the right & not the obligation, to buy or sell the underlying asset. • Risk Profile: Futures Contracts have symmetric risk profile for both the buyer as well as the seller (with potential for huge losses on both sides), whereas options contracts have asymmetric risk profile. In case of Options, for a buyer (or holder of the option), the downside is limited to the premium (option price) he has paid while the profits may be unlimited. For a seller or writer of an option, however, the downside is unlimited while profits are limited to the premium he has received from the buyer. • Influencing Factors: The Futures contracts prices are affected mainly by the prices of the underlying asset. The prices of options are
