What is the difference between a futures contract and an option?
The main differences between a futures contract and an option include: • A futures contract is a legally binding agreement to buy or sell an asset on a specified future date. In other words, both parties have a contractual obligation. Both buyers and sellers have significant exposure should the market move against them. • The buyer of an option contract, on the other hand, has the right, but no obligation, either to buy or to sell the underlying asset. This means that the option buyer’s maximum possible loss is limited to the premium paid. • Both the buyer and the seller of the futures contract are margined, whereas margins are paid only by the seller of an option. • There is no exercise price for a futures contract – you simply buy or sell a contract with the maturity date of your choice at the market price at the time. • You do not pay a premium when you trade a futures contract – instead you pay a small deposit or initial margin.
