Futures and Options -Basics

The main fundamental difference between options and futures lies in the obligation to exercise the contract. An option gives the buyer the right, but not the obligation to buy(or sell) a certain asset at a specific price at any time during the life of the contract. A Call is an options contract that gives the buyer the right but NO obligation to buy the underlying asset at the strike price on the expiration date. A call option is bought if the trader expects the price of the underlying to rise within a certain time frame. For these rights the call buyer pays a “premium”.Ex: if the stock is trading at rs.90 on the stock market, it is not worthwhile for the call option buyer to exercise their option to buy the stock at rs.100, because they can buy it for a lower price (rs.90) on the stock market. A Put is an options contract that gives the buyer the right but NO obligation to sell the underlying asset at the strike price on the expiration date. A put option is bought if the trader expects the price of the underlying to fall within a certain time frame. For these rights the put buyer pays a “premium”.Ex:If the stock is trading at rs.100 on the stock market, it is not worthwhile for the put option buyer to exercise their option to sell the stock at rs.90, because they can sell it for a higher price (rs.100) on the stock market. A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date and agreed price. In future no advance payment is required. Whereas in Options Premium required to be paidto the seller of the Put option.