Stock index futures and index options?

Question

What's the difference between a stock index future and an index option? If I purchase the right to buy an S & P 500 future at $300 per share and the index goes up to $450 per share by the date of expiration of the futures contract, I make a loss of $150.

How would it look like and how would the process work if I went for an index option in the above case?

In addition, do I make the whole payment right when purchasing the right to buy / sell in futures contracts as well as options?

Answer 1

An option is gives you a right to buy or sell a futures contract between the purchase date and the expiry date, but crucially, you don't have to exercise the option at the end of it if the market has not gone in your favour. You will pay a premium for the option, the amount of which depends on the price of the underlying, interest rates, market volatility and amount of time to exercise the option.

In your example, instead of loosing $150, you would just let the option expire without exercising it and you would have just lost the price of the option itself (perhaps $10)

Answer 2

The future is not a share, you would buy so much per point movement. You wouldnt buy the cash future otherwise you would get all the stock of the index. Say you buy the June Dow future (this expires on the 17th I think) Price is 12212-12218. You could buy $10 a point at 12218. If the quote moves up (following the cash Dow) 20 points you make 20*$10. You can sell to open and buy back later if you are bearish. The fair value is calculated from the cash price, future dividends in the period, interest rates (time value) and volatility.

With an option you are just buying (or selling) the right to buy the underlying (in your case the S&P 500) at a set price (strike) and within a set time scale. If the trade goes the wrong way you just abandon it and only lose your premium paid. Of course you can write futures and options where you are giving the buyer the right to put or call the underlying (slightly more dangerous)