- Futures and options may at first appear to be similar transactions, but while they are related they are distinctly different. According to FuturesBuzz.com futures are characterized as having unlimited risk on long and short positions, establishing a fixed price and requiring a margin on long or short positions. On the other hand, options are characterized by FuturesBuzz as limiting risk on positions, establishing floor or ceiling price protection, and not always requiring a margin on long or short positions.
- While options are slightly riskier than futures they can be quite rewarding as well because they can offer the trader a substantially better margin than futures. Further, options are what is called a "wasting asset," which means that it loses value over time and is riskier in that regard as well. Additional risks lie in what the future or option will be worth after they expire. An option is subject to unlimited risk because it is not directly tied to a product. Conversely, futures are tied to the actual value of the product that it is representing and as such has the potential to mitigate loss.
- Another key difference between futures and options is the obligations put on buyers and sellers. According to the Investopedia, "An option gives the buyer the right, but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract. A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date, unless the holder's position is closed prior to expiration."
- Futures and options are also structured differently in terms of fees. For a futures contract the investor can begin a contract with no upfront cost, whereas with an option the investor must pay a premium to get started. The reason that there is an upfront fee for an option is essentially because it is insurance that transaction fees will be paid against a severe drop in price, in which case the investor would lose only the premium rather than a great deal more on having to buy because he or she is not obligated to buy with an option.
- The way in which a gain is received is also a major difference between futures and options. With an option, a gain can be obtained by exercising the option, by taking the opposite position in market, or by allowing the option to expire without taking action. Conversely, gains on futures are decided by the price of the future at the end of the trading day. However, like an option, an investor can realize the gains on a future by taking the opposite position in the market.
