Difference Between Future vs Option
Future vs option both are the tools of a derivative segment that are extensively used by traders across the globe. Future price is based on the base price of a security (stock price/ commodity price /currency price) and three months forward prices are extracted depending on the spot price of the security. Similarly, an option is an instrument that allows the trader to trade on a particular script and the movement of the price depends upon the price of the script in the cash market. The put option acts just in the opposite way and the trader’s trades when they feel that the stock is going to fall in the near term.
- Future price is based on the base price of a security. For example, The Spot price of TATA Steel Limited at the Cash segment is trading at INR 550, and then the price of Future price in a current month would be 552 followed by 554 and 557 for the next two months future price. This indicates that traders are bullish in TATA STEEL and the prices have adjusted accordingly, similarly in a Bearish situation when the traders are expecting the scrip to fall, the price would decrease simultaneously.
- It is important to note that the Future prices stay for that particular month only, with the expiry of that particular month the price also abolishes. The Future price of any script will stay for three months’ tenure, for example, March Future price of a particular script will start from January and will stay till March end only.
- Traders can buy or sell the Future contract and hold for three months and they have to pay only a part (20% of the total amount) and the margin money would get adjusted after each day’s closing price. However, there is a restriction of buying a certain number such as the Trader can trade on the multiple of a certain number of that scripts as decided by the market regulator for the particular scripts.
- There are two kinds of options viz Call Option (when the trader wants to go Long) and Put option (when a trader wants to short). For example- suppose the price of the scripts at the Cash market is INR 100/ share and the Call option for ‘in the money for strike price 100 quotes INR 10, for the same lot as in the Future segment.
- Again when the script is trading at INR 100, the out of money call (strike price 110) will be a bit less say suppose INR 8, and then out of money call (strike price 90) would be higher at say 14.5 because the CMP is at 100 which is higher than 90.
- If the price decrease and tends toward INR 90 then the Call option would decrease from 8 to 6 or5. If on the other if the price tends to increase from INR 100 to 105, the option of strike 110 would increase from 8 to 10. When the traders pay for the contract for Call or Put option, the contract premium is paid against fees which are the current rate of the option. The value of the premium decays when it approaches the settlement date or the expiry date.
Head to Head Comparison Between Future vs Option (Infographics)
Below is the top 3 difference between Future vs Option
Key difference between Future vs Option
Both Future vs Option are popular choices in the market; let us discuss some of the major differences :
- Future is almost the same as the cash price except the capital required for the trade is only 20% of the total traded value. Whereas the premium price can be bought at a price that is much lower than the investment made for the future. However, if an out-of-the-money option is bought, then the price becomes sufficiently lower.
- If the flexibility is concerned then the Stock option provides higher flexibility compare to the stock future as the Future is related to the entire price of the stock and there is an absence of any strike price.
- Unlike Future derivatives, options can provide an abnormal return on investment within very few days provided that the trade is made in the right direction. The premium has the ability to become multiple times when there is an abnormal movement of the stock. The Future derivates give a higher return, but in most of the cases, they cannot multiply the amount of Investment.
Head to Head comparison between Future vs Option
Below is the topmost comparison between Future vs Option
|The basis Of Comparison||Futures||Option|
|Meaning||Related to the current price market price of a particular stock or an index and it is the derived price of the particular script. It is basically the forwarded futuristic price and the price remains more or less similar to the stock price.||Related to the strike price of the derivative and the Current market value of the stock. If the strike price is closer to the current market price in a Future market, then the premium amount increases.|
|Financial Liabilities and return||The liability is maximum in case of future as the trader is entitled to take the risk of the entire stock price. In case, if the stock splits or corrects due to Bonus issue or any major movement in the price can hamper the value of an investment. Thus the trader has to pay the additional capital to fulfill daily obligations. In the case of profits, the trader can get abnormal profits also if they hit in the right direction.||In case of a call or put option, when a trader opts to buy, he pays the premium amount at a particular strike price. Thus the trader is entitled to bear the risk of the ‘premium amount’ only. In case of any major movement of the script, the trader would lose only the amount of premium, and the amount of return is also unlimited considering the amount of capital invested.|
|Depreciation or Decrease in value||Depreciation is not accountable in most cases, but the valuation is decided by the buyer and seller and is dependent on the demand and supply. During expiry, the traders can square off the positions and can take new positions in new expiry.||The value of the option decays when it approaches expiry. The value of the premium remains high during the early days of expiry considering that the stock remains range-bound for the time being.|
Future vs option both are the forms of trading tools that are frequently used by the traders for short-term gains. The prime focus is to catch the trend at which the stock would likely move in a specified time frame. Thus, with the risk, ROI, total capital amount determines which path to follow. In the case of hedging both Future vs option tools can be implemented; for example- In a long trade the trader can buy the future and control the downward risk a put option with a limited capital could be bought. In case the market tanks the return from the put option can be multiplied.
This has been a guide to the top difference between Future vs Option. Here we also discuss the Future vs Option key differences with infographics, and comparison table. You may also have a look at the following articles –