What Futures Is The Difference Between A Futures Contract And A Futures Option?
They are similar in that they both have an expiry date; otherwise, they have little in common. The crucial distinction is that whereas a futures contract is an obligation, a futures option is a right to buy or sell a commodity at a specific price any time before the option expires. A call (buy) option gives the holder the right to buy at a known price – the option’s strike price at or immediately prior to its expiry. When you call an option, the price – and ostensibly the risk – is limited to the cost of the premium. The premium takes account of the length of time, the volatility of the market and the relative value of your strike price to the underlying market. A put (sell) option, meanwhile, confers the right to sell a commodity at a known price, i.e. the strike price of the option at or prior to the expiry of the option. The seller of a put option receives the option premium and agrees to buy the underlying commodity from the option holder if the option holder exercises the option.
