| Definition |
A standardized contract to buy or sell an asset at a predetermined price on a specific future date. |
A contract giving the buyer the right, but not the obligation, to buy or sell an asset at a specified price before or on expiration. |
| Obligation |
Both buyer and seller are obligated to fulfill the contract on the expiry date. |
Buyer has the right but not the obligation; seller has the obligation if exercised. |
| Risk |
Potentially unlimited risk for both buyer and seller. |
Buyer’s risk limited to the premium paid; seller may have unlimited risk. |
| Premium |
No premium; both parties must post margin. |
Buyer pays a premium upfront; seller receives the premium. |
| Leverage |
High leverage due to margin trading. |
Leverage via premium but generally lower than futures. |
| Profit/Loss Potential |
Unlimited profit or loss based on price movement. |
Buyer has limited loss (premium), unlimited profit (call) or limited profit (put). |
| Exercise |
No exercise, contract settles on expiry or is closed before expiry. |
Can be exercised anytime before expiry (American) or only at expiry (European). |
| Settlement |
Physical delivery or cash settlement. |
Physical delivery or cash settlement. |
| Usage |
Used for hedging, speculation, and arbitrage. |
Used for hedging, speculation, and income strategies. |
| Flexibility |
Less flexible; fixed contract terms. |
More flexible; various strike prices and expiry dates. |
| Market Sentiment |
Reflects strong commitment to price direction. |
Reflects optionality and hedging preferences. |
| Cost to Enter |
Margin deposit required, no upfront premium. |
Premium paid upfront by option buyer. |
| Time Decay |
No time decay; contract value depends on price movement. |
Option value decreases over time (theta decay). |
| Impact of Volatility |
Volatility affects margin requirements but not contract terms. |
Higher volatility increases option premiums. |
| Margin |
Mandatory margin maintenance by both parties. |
Only option sellers maintain margin; buyers pay premium. |
| Expiration |
Contracts have a fixed expiration date. |
Options have multiple expiry cycles and strike prices. |
| Example |
Agreeing today to buy 100 shares at ₹1500 in 3 months. |
Buying a call option to buy 100 shares at ₹1500 within 3 months. |
| Risk Management |
Requires active monitoring to avoid margin calls. |
Risk limited to premium for buyers; sellers have risk exposure. |
| Settlement Frequency |
Marked-to-market daily settlements. |
No daily settlements; settled on exercise or expiry. |
| Popularity |
Widely used in commodities, indices, currencies. |
Widely used across stocks, indices, commodities, currencies. |
| Investor Profile |
More suited for experienced traders and hedgers. |
Used by both beginners and advanced traders. |
| Tax Treatment |
Varies by country, often treated as capital gains. |
Varies by country, may have different tax treatment than futures. |
| Psychology |
Requires commitment to position, risk tolerance. |
Allows strategic risk-taking with limited downside. |
| Strategic Use |
Best for directional bets and hedging large exposures. |
Best for income generation, hedging, and leverage with limited risk. |
futures vs options