How are options different from futures?
Here are some key features which differentiate futures from options:
| Feature | Options | Futures |
| Contract Type | Gives the holder the right, but not the obligation, to buy/sell an asset at a specific price. | Obligates the buyer to purchase, or the seller to sell, an asset at a predetermined price. |
| Obligation | Holder has the choice to exercise or not exercise the contract. | Both parties are obligated to fulfill the terms of the contract. |
| Market Participation | Used for speculation, hedging, and generating income through premiums. | Primarily used for hedging against price fluctuations. |
| Risk and Reward | Limited risk (premium paid) with potentially unlimited profit. | Unlimited profit potential but also unlimited risk. |
| Market Accessibility | More accessible to retail investors due to lower capital requirements. | Typically requires larger capital due to the margin requirements. |
| Flexibility | Provides flexibility as traders can choose not to exercise the option. | Less flexible as the contract must be fulfilled at the agreed-upon terms. |
| Leverage | Provides leverage through premium payment. | Involves leverage through margin requirements. |
| Underlying Asset | Can be based on various underlying assets (stocks, commodities, indices). | Usually involves commodities, financial instruments, or indices. |
| Price Determination | Premium is influenced by the underlying asset price, volatility, time to expiration, and interest rates. | Influenced by the spot price of the underlying asset and expectations of future prices. |
| Termination | Options can be exercised at any time before expiration or left to expire. | Futures contracts must be fulfilled on the expiration date unless offset earlier. |
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