The Indian secondary market which is commonly referred to as the stock market, allows you to trade in stocks and derivatives. Derivatives are amongst the most preferred choice of traders and investors due to a number of advantages over conventional stocks.
Future contracts are contracts between two or more parties for buying or selling a particular asset on a future date at a pre-decided price. The Future contracts are widely used for speculation and hedging. On the other hand, options or option contracts give the investor the right but not the obligation to sell or buy a stock or any other underlying asset at a pre-determined price or date. Options can be classified into two types namely call option and put option. Let us now discuss in detail about the differences between options contracts and future contracts.
Let us now discuss in detail about the differences between forward contracts and future contracts.
So, without further ado let us discuss about the differences between futures and forward contracts in detail.
1. Forward contracts vs Futures
Forward contracts are OTC contracts which means that they are traded Over the Counter. These are not standardized contracts are therefore are not traded on the exchanges. The OTC nature of these contracts makes it easier for the users to customize terms. However, there is a high level of default risk associated with these contracts due to the lack of a centralized clearing house.
Forward contracts can be customized as per the need based on the underlying asset, amount and delivery date. Forward contracts are not easily available to retail investors when compared to the futures contracts.
Forward contracts and futures contracts are very much similar in nature. Both forwards and futures contracts involve buying or selling an underlying asset at a set price in the future. The key point which differentiates forward contract from futures is that forward contracts are not traded on the exchange. Forward contracts are settled at the end of the contract tenure, whereas the profit and loss for futures contracts is set on a daily basis. Above all, the main highlight with futures contracts over forward contracts is that futures are standardized contracts which are not customized unlike futures between counter parties.
2. Head to Head Comparison
Let us now have a look at a head to head comparison between Options contracts and Future contracts based on various parameters.
Level of Risk – Futures contracts have a high level or risk whereas in case of options, the risk is only limited to the amount of premium paid.
Buyer’s Obligation – In case of futures the buyer has full obligation for executing the contract. On the other hand, there is no such obligation in options
Seller’s Obligation – The seller of Future contracts has complete obligation but in case of options if the buyer chooses, the seller will have to abide by the same.
Payment – For buyi9ng a futures contract, no advance payment is required, but in case of options, an upfront premium amount is required which is usually a small percentage of the entire amount.
Execution Date – Futures Contracts can be executed on the mutually agreed future date as per the contract. AN options contract can be executed anytime before the expiry date.
Time Value of Money – Futures Contracts do not consider the time value of money. But options contracts heavily rely on the time value of money.
These were some of the key parameters for comparing forward contracts and options contracts, which can help you in getting a detailed idea about the differences between these two derivative instruments.
Conclusion
Futures and Options are standardized derivative instruments which can prove out to be a great alternative to stock trading, provided that you have proper knowledge required for trading in them. You can take the help of Equity Derivative Pack, which can provide you research based recommendations for all your futures and options trading needs. If you want to use swing trading strategies in your derivatives trading, you can use Delta Derivative Plus. Also, you should get your risk profile evaluated from a SEBI registered investment advisor before investing in any of the investment instruments to have an idea about your risk bearing capacity.
