Difference between options and futures?

Question

I have trouble grasping the difference between these two. Can someone give me a (reasonably) simple explanation of both and highlight the differences between the two?

Answer 1

The main difference is that most options expire worthless, while futures will expire at the underlying price, i.e., they will never be worthless.

Options fluctuate more on implied volatility than on the underlying price. Futures have a smaller and more stable implied premium, that only fluctuates in a fast market, and erodes steadily to expiration by small increments, and to the trader is inconsequential. Essentially, the futures price is tied steadfast to the underlying, while the option can fluctuate all over the place.

With an option you are working against volatility and time -- not so with the futures contract. The futures contract is very similar to trading the spot price of the underlying, except you are highly leveraged. Or if you only purchased one Dow mini contract for each $150,000 in your account, it would be unleveraged, and nearly identical to trading the spot, or buying all 30 Dow stocks.

The other main difference is that with options, you can only lose up to the amount invested -- you can definately lose it all, and probably will if you Buy them -- as you stated, most options expire worthless.

With futures, you can lose MORE than you invested -- you could end up owing them your house if you're not careful - unlimited loss potential. But this isn't any different than being short options, or short stock, except for the leverage. It seems that only with futures, can you be wiped out in a single day, and many have, including me. Harder lesson to learn the hard way.

Answer 2

A future is a financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.

There are two different types of options, call options (or calls) and put options (or puts).

A call is an agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.

A put is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time.

The primary difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his/her contract.