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Difference between options and futures

Q: What is the difference between options and futures?

A: The primary difference lies in the obligation placed on contract holders and writers. In a futures contract, the holder is obliged to buy (or sell) the underlying asset at a specific price at a specific future date. On the other hand, an option gives the holder the right but not the obligation to buy (or sell) the underlying asset at a specific price at anytime before the expiration date. Hence the term option and this option comes at a price in the form of a premium (more specifically, the time value of the premium).

As a result, while both buyers and sellers of futures contracts face the same amount of risk, sellers of options take on an additional volatility risk in exchange for a premium and this premium can be high if the underlying asset is perceived to be very volatile.

More Frequently Asked Questions

  1. What are the differences between standardized options and employee stock options?
  2. I recently bought a call option. Since then, the stock price has risen and so has the call option. I wish to sell my call option for a profit but am I obligated to deliver the underlying stock if the option buyer decides to exercise his call option?
  3. Does an increase in open interest imply a bullish sentiment?
  4. I own options on a stock that has just declared a 2 for 1 stock split. What happens to my options?
  5. Why do some stocks have options for trading while others don't?
  6. Can i be assigned if I buy-to-close a short position?