InvestorQ : How exactly are options contracts different from futures contracts?
Bhavik Nehru made post

How exactly are options contracts different from futures contracts?

Bhavik Nehru answered.
3 years ago

To begin with, both futures and options are derivative contracts because their value is derived from an underlying asset which could be a stock or an index. However, a future is a symmetric transaction because the rights and the obligations of the buyer and the seller of the future are the same. On the other hand, in case of options, the buyer of the options has the right with an obligation whereas the seller of the option has the obligation without the right. Here are some key points of difference between futures and options.

Firstly, futures are agreements/contracts to buy or sell specified quantity of the underlying assets at a price agreed upon by the buyer and seller, on or before a specified time. Both the buyer and seller are obligated to buy/sell the underlying asset. In case of options the buyer enjoys the right & not the obligation, to buy or sell the underlying asset.

Futures Contracts have symmetric risk profile as stated above for both the buyer as well as the seller, whereas options 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.

There is a major difference in the way the futures and options contracts are priced in the market. The Futures contracts prices are affected mainly by the prices of the underlying asset. The prices of options are however; affected by prices of the underlying asset, time remaining for expiry of the contract, interest rate & volatility of the underlying asset. In fact, volatility is one of the key factors impacting option values on a continuous basis.