Wondering whether to invest in Futures or Options? Here’s a guide for you – ​Understanding Markets

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​Understanding Markets

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​Understanding Markets

Futures and Options are two frequently used terms in financial markets. Here are the key differences between the two to help you choose the right derivative tool for your investments.

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​Nature of Contract

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​Nature of Contract

In Futures, it is obligatory to buy/sell at a future date. Meanwhile, an Options buyer has the right to buy/sell.

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​Type of Agreement
Both Futures and Options have a standardised agreement.

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​Obligation
In Futures, it is necessary to fulfil contract obligations. Meanwhile, Options holder can choose to exercise.

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​Rights and Obligations

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​Rights and Obligations

Both buyer and seller have obligations in Futures whereas in Options the buyer has the right and the seller has the obligation.

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​Risk and Reward
There is unlimited profit and loss potential in Futures whereas an Options holder has limited risk and unlimited profit potential.

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​Price Movement Impact

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​Price Movement Impact

In Futures there is a direct correlation with underlying, meanwhile, in Options there is a non-linear relationship due to pricing.

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​Market Participation

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​Market Participation

In Futures there is speculation or hedging. In Options there is speculation, hedging and income generation.

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​Initial Investment

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​Initial Investment

Margin requirements apply in Futures whereas the premium is paid upfront in Options.

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​Settlement
Futures see daily settlement whereas Options settlement is exercised or expires at the expiration date.

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​Examples
Futures include commodities, stocks and indices; Options include equity options, index options and commodities.

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Flexibility
There is less flexibility in Futures due to obligation as compared to Options where there is more flexibility as it’s a right.

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​Purpose
The major purpose of Futures is hedging against price fluctuations whereas that of Options is hedging, speculation and income generation.

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