Options and futures contracts are identically forms of derivatives. They are carefully created and crafted financial derivatives for hedging practices. In essence, both underlying applications are quite different. However the key difference between them is that futures ensures that each party has the OBLIGATION to buy/sell, while options on the other hand provides holders the right (NOT OBLIGATION) to buy/sell. Both are financial products that investors and traders can use to make money or to hedge and mitigate risk on current investment positions.
Options are based on the value of an underlying security such as a coin, stock, tradeable asset. As stated above, an options contract provides investors the opportunity/right to buy/sell the asset at a specific price while the contract is still valid, or until expiry. Investors need not execute the right to buy/sell the asset if they decide otherwise. Options are also a derivative form of investment that offers to buy/sell coins or stocks but do not have any representational ownership of the underlying investments until the agreement is finalized. There are 2 kinds of options that are available in the market (call and put)options. Call option is a right to buy a coin/stock at the right price before an agreement expires. Put option is right to sell a coin/stock at a specific price.
Person A might want to buy a car from Person B at $50,000 at some point in the future. So A and B come to an option agreement which will give Person A the right to buy the car from Person B for $50,000 anytime in the next month. Person A has no obligation in any aspect to buy the car, however for extending or offering this option, Person B receives $5000. This money collect ($5000) is called the premium. If Person A chooses not to buy the car, he loses his premium of $5000.
A futures contract is the contractual obligation to buy/sell an underlying security such as a coin, stock, tradeable asset at an agreed-upon price. Futures contracts are very common in the world of commodity trading and are often utilized as a true hedge investment. These would entail examples of commodities such as (oil, corn, metals). Seller perspective-futures contracts are often used to lock in an acceptable price upfront for the future just in case market prices fall before production or delivery of the agreed commodity. Buyer perspective-futures contract used to lock in a pre-agreed price upfront to protect buyers if the prices soar just before delivery or production.
Company A and Company B agrees to a price of $100 per barrel for crude oil on a futures contract, if the price moves up to $110, the buyer of the contract makes a profit of $10 per barrel. The seller would then lose out on a better deal. However for a futures contract, the buyer is OBLIGATED to execute the contract unlike an options contract.
OCTION aims to educate users and traders alike to the differences in the different kinds of financial derivatives provided in the market. OCTION will also continue to update our ever-growing community on the latest products and services. OCTION is currently in the midst of developing one of the world’s most cutting edge and fully integrated CeDeFi options trading platform, allowing users a seamless and straightforward trading experience. If you would like to know more of have a discussion about our project and what OCTION does, feel free to join us at any channel that is most convenient for you. Thank you for your time.
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