Derivatives | What is the difference between Futures and Options

Futures and Options examples
Futures and Options examples

Futures and options fall under the category of financial instruments called derivatives which owe their name to the fact that their value derives from other financial assets such as stocks, currencies, indices, interest rates, bonds, commodities etc. also called underlying assets. There are exchange traded financial derivatives and other unlisted, also called OTC (over the counter) which are more dangerous because they have not been monitored by regulators and sold or purchased directly between buyers and sellers. To prevent systemic risks they have recently entered into force on EMIR. To return to the derivatives that are traded on an exchange instead, the most important of them are futures and options. Here are the main differences.

Futures and Options differences

Futures and Options differences

Futures are forward contracts in which the parties agree to buy or sell a certain amount of maturity financial assets at a fixed price. For example, if the subject A and B enter into oil futures, they decide the price at which the oil will exchange between a year and maturity is required to sell and buy at the price initially established.

Futures and Options

Futures and Options

Options are contracts that do not involve an obligation but only the right to buy or sell a certain amount at maturity of the underlying financial asset at a given price established. This right is acquired upon payment of a premium which is the price of the option. The seller has the right to choose the one who buys the option and then pays the premium. Who sells it has to get back in full the decisions of the other.

Futures and Options examples

Futures and Options examples

The difference is therefore in obligation as opposed to the right to buy or sell. In addition, to get into futures you do not pay anything apart from the security deposits while to enter into an option contract you pay a premium. In a future article we will discuss the difference between put and call options.

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