In trading, it is quite common for the terms options and
futures to be used interchangeably. Although these two contracts have a lot of
similarities when it comes to principles, they are actually two very different
things and therefore interchanging them when conducting trades in the market
can be a very lethal mistake for anyone.
Let us learn the differences between these two contracts in
order to prevent making the wrong decisions in buying and selling rights for
stocks or commodities. Through this, we may just be able to prevent risks and
maximize chances for profit.
What Is An Options Contract?
An option is basically the right to buy or sell a specific
amount of stock, currency, or whatever commodity offered in the market. This
contract basically allows an individual to enjoy, but to necessarily become
obligated, to exercise these rights. This contract can only be valid for a
specific period of time, and commodities traded can only be bought and sold at
a certain fixed price.
What Is A Futures Contract?
On the other hand, a future is a transferable contract that
requires the delivery of a certain stock, currency or whatever commodity
traded. Like an option, the delivery of the trade is done through a fixed price
stated in the contract and within a time frame, so one should not go beyond the
expiry date.
However, it is very important to take note that a holder is
obligated to exercise the conditions of the contract unlike in options where
the holder can have the liberty of deciding.
The Differences Between Options And Futures
Aside from the fundamental difference between the two
contracts on rights and obligations, there are also other differences that
include commissions, the size of underlying stocks or commodities traded and
how gains are realized.
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