Both Futures and Options are derivative contracts whose value is derived from an underlying asset such as a stock, index, or commodity. However, they differ in terms of rights, obligations, and risk exposure.
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🔹 1. Meaning
• Futures:
A contract to buy or sell an asset at a fixed price on a specific future date. Both buyer and seller are obligated to complete the transaction, regardless of how the market moves.
• Options:
A contract that gives the right but not the obligation to buy (Call) or sell (Put) an asset at a fixed price before or on a specific date. The buyer has flexibility, while the seller carries the obligation if exercised.
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🔹 2. Example
• Futures:
You agree to buy Nifty at ₹22,000 next month.
If Nifty rises to ₹22,300, you earn ₹300. If it falls to ₹21,800, you lose ₹200.
• Options:
You buy a Call Option on Nifty at ₹22,000 by paying a premium of ₹100.
If Nifty rises to ₹22,300, you gain ₹200 (₹300 – ₹100).
If Nifty falls to ₹21,800, you lose only the ₹100 premium.
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🔹 3. Risk & Reward
In Futures, both buyer and seller have unlimited profit potential but also unlimited loss risk, since prices can move sharply in either direction. Margins are required to ensure contract performance.
In Options, the buyer’s risk is limited to the premium paid, while their potential gain can be significant if the market moves in their favor. The option seller, however, faces potentially unlimited loss if the market moves against the position, but earns only the fixed premium received.
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🔹 4. Practical Use
• Futures are widely used for hedging large exposures and speculative trading.
• Options are used for strategic positioning, hedging with limited risk, and income generation (through option writing).
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💡 Quick Takeaway:
“Futures lock you in; Options let you choose.”
Regards
Shining Stars 🌟🌟🌟
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