Futures and options are two types of financial derivatives contracts that derive their value from market movements for the underlying index, security, or commodity. Both futures and options allow an investor to buy an investment at a specific price by a specific date. However, there are important differences in the rules for options and futures contracts, and in the risks they pose to investors.

Futures Trading

• Futures are contracts that have to be settled (paid for) once you enter into them. If you enter a futures contract, you are obligated to buy or sell the underlying asset at a pre-specified price on or prior to a certain date.
• In futures trading, a trader has to keep a certain percentage of the future value with the broker as a margin to take the buy/sell position.
• Futures trading is widely practiced on leverage, wherein the entire cost of trading does not have to be paid upfront.

Options Trading

• An option gives the buyer the right, but not the obligation, to buy (or sell) an asset at a specific price at any time during the life of the contract.
• Options are based on the value of an underlying stock, index future, or commodity. An options contract gives an investor the right to buy or sell the underlying instrument at a specific price while the contract is in effect.
• To buy an Option Contract, the buyer has to pay a premium.

Options on Futures Trading

• An option on a futures contract gives the holder the right, but not the obligation, to buy or sell a specific futures contract at a strike price on or before the options expiration date.
• An option on a futures contract is very similar to a stock option in that it gives the buyer the right, but not obligation, to buy or sell the underlying asset, while creating a potential obligation for the seller of the option to buy or sell the underlying asset if the buyer so desires by exercising that option.

In summary, futures and options trading are two types of financial derivatives contracts that allow investors to speculate on market price changes or to hedge risk. While futures contracts obligate the buyer to purchase a specific asset, and the seller to sell and deliver that asset, at a specific future date, options give the buyer the right, but not the obligation, to buy or sell an asset at a specific price at any time during the life of the contract. Options on futures are similar to stock options, but they give the holder the right, but not the obligation, to buy or sell a specific futures contract at a strike price on or before the options expiration date.