Futures and options are two types of financial derivatives that investors can use to speculate on market price changes or to hedge risk. Here are some key differences between futures and options:
Futures:
- A futures contract obligates the buyer to purchase a specific asset, and the seller to sell and deliver that asset, at a specific future date and price.
- Futures contracts have expiration dates and set prices that are known upfront.
- Futures are used to hedge the price movement of an underlying asset to help prevent losses from unfavorable price changes.
- Futures allow traders to lock in the price of the underlying asset or commodity.
Options:
- 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 contracts have expiration dates, but the buyer is not obligated to buy or sell the asset.
- Options can be used to hedge against potential losses or to speculate on market price changes.
- Options can be bought and sold on futures.
In summary, futures and options are both financial instruments used to profit on, or hedge against, the price movement of commodities or other investments. While both allow investors to buy an investment at a specific price by a specific date, there are important differences in the rules for options and futures contracts, and in the risks they pose to investors.
