Friday, 3 April 2015

Difference between options and futures

Option Markets
Options are standardized contracts that allow investors to trade an underlying asset at a specified price before a certain date (the expiry date for the options). There are two types of options: call and put options. Call options give the buyer a right (but not the obligation) to buy the underlying asset at a pre-determined price before the expiry date, while a put option gives the option-buyer the right to sell the security.
Options are attractive to hedgers because they protect against loss in value but do not require the hedger to sacrifice potential gains. Most exchanges that trade futures also trade options on futures. 
Futures Markets
Futures contracts are agreements to trade an underlying asset at a future date at a pre-determined price. Both the buyer and the seller are obligated to transact on that date. Futures are standardized contracts traded on an exchange where they can be bought and sold by investors.

Although the underlying risks have changed, some important futures markets still operate much as they always have, with traders standing in a ring or a pit shouting buy and sell orders at each other, competing for each fraction of a cent. But electronic trading is rapidly changing how traders trade. Computer terminals linked to each other through electronic trading systems let traders access a virtual trading floor from anywhere in the world. Exchanges compete with each other to attract traders by doing a better job of providing the benefits that traders expect from a fair market. 

Difference between options and futures
The biggest difference between options and futures is that futures contracts require that the transaction specified by the contract must take place on the date specified. Options, on the other hand, give the buyer of the contract the right — but not the obligation — to execute the transaction. Both options and futures contracts are standardized agreements that are traded on an exchange such as the BSE or NSE. Options can be exercised at any time before they expire while a futures contract only allows the trading of the underlying asset on the date specified in the contract.

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