FUTURE VS OPTION

Here we attempt to explain basic difference between Future and Option Contracts

Premium

While you pay a fee called the "premium" when buying stock options, there are no premiums to be paid in a futures contract. The initial amount of money (known as "Initial Margin") paid when you buy a futures contract is a fraction of the price paid for the underlying stock. While wrinting options you receive premium.

Obligations

Buyers of stock options are not obligated to exercise the rights to buy the underlying stock at all while buyers of futures contracts  or option writers are obligated  settle difference with cash market and pay mark to mark daily.

Liability

Buyers of futures contracts  and option writers are exposed to unlimited liability should prices move against them while buyers of stock options lose only the amount of money used to purchase those stock options.

Expiration

Buyers of futures contracts can carry forward  their position by selling current month contract and buying next month or vice versa. Options expire worthless if the options are out of the money.

Versatility

Options trading is a lot more versatile than futures trading as the unique combination of call options and put options along with the premium on each contract made it possible for options strategies that profit in all directions. Apart from arbitraging, futures trading is basically single directional (you make money only when price moves in one direction).

By now, it should be clear that futures and stock options trading are two totally different things with their own trading characteristics. Futures trading is an important risk management and speculative technique while options trading has evolved to become a stand-alone strategic investment. Futures should never be made a replacement for stock options trading and stock options trading cannot replace Futures as well. Both trading instruments serves different purposes and should find their place in every well diversified portfolio.