Future trading and options trading - these terms are popularly used by investors who invest in the asset class. The basic difference between these two types is the question of obligation. In futures trading, there will a burden on the investor to buy the asset on a particular date, while in options trading, the investor can deny buying it. So, there will be an option to not buy the asset. The major differences between future and option trading are mentioned below.
Question of obligation
In case of future trading, the buyer and the seller agree on the sale of an asset at a particular price, which will be delivered on a particular date. So, for the investor, it will be an obligation. Like, an investor, trading in the gold futures market like MCX, or Comex, orders something for a particular date. They agreed on a particular price. It is known that gold rates are very volatile in international markets. So, if the investors order a gold future at the current market price, but later, at the time of delivery, the price drops, still the investor will have to buy it. So, the investor can face loss at that time. But, in case, the rates go upward, at the time of delivery, then the investor will certainly gain profits. Hence, in the case of future trading of an asset, an investor can either make profits or face loss.
On the other hand, for options trading, an investor can avoid the loss because there is no obligation on the investor to buy on the fixed date. If an investor trades in the options contract and agrees with the seller on a particular time for delivery at a fixed rate, the investor will not be forced to buy it then. Again, we can derive an example from gold options. The gold rates change in the global market every day. If an options investor buys a gold option and agrees to receive it after 3 months at a fixed rate, still he/she can deny it if the gold rate drops by then. Buying at a higher price could lead the investor to loss, like in the futures contract. But the 'option' of denying makes it lucrative for traders. But if the investor wants to buy the asset on the previously fixed date, then the seller will have to sell it to the investor, the seller cannot deny selling it.
'Premium' in the options contract
However, a buyer in the options trading is required to pay a premium, that grants the option investor the privilege to not buy the asset on a fixed future date, in case it becomes less attractive. So, if the investor does not buy the asset on the fixed date, the premium amount will be a loss. In both future and option contracts, the investor needs to pay a certain commission amount.
Hence, by trading in the options contract, one can avoid the potential loss, the buyers experience an advantage here. But the fall in the market value of the asset can impact a future trader negatively.
The futures contract will take place on the stock exchange, but an option contract can take place both on and off the exchanges. Both of these types of contracts can cover stocks, bonds, commodities or assets, and currencies.