A futures contract is an agreement between a buyer and seller of the contract that some asset–such as a commodity, currency or index–will bought/sold for a specific price, on a specific day, in the future (expiration date). A futures owner has the obligation to buy or sell a specified quantity of an asset at a specified price on a specified date.
Options are the contract in which the investor gets the right to buy or sell the financial instrument at a set price, on or before a certain date, however the investor is not obligated to do so. In future no advance payment is required. But in Options Premium required to be paid. Degree of Profit/Losses in Future trading is Unlimited, In Options Unlimited Profit and limited loss.
In case of Futures/Options contract, it is mostly cash settled unlike forward contract (which is generally settled by physical delivery) since exchange monitors the contract ensuring smooth execution.
Example- Say you go long on 10 wheat contract whose current market price is Rs 500 per contract. On contract expiration (assuming it after three months), the price contract went up to Rs 600. You’re gain per contract stands at-
Rs 600 (Final price) – Rs 500 (Entry price) = Rs 100 per contract.
Thus, total profit= Price per contract x Number of contract = 100 x 10= Rs 1000
