Futures vs Options

February 20, 2023

Top 7 Differences Between Futures & Options  – YOU MUST KNOW!

Before we get into the difference between futures and options, let’s first understand how futures and options work with the example of bikes.

Content:

What is Future and Options Trading?

Firstly, you need to understand that both Futures & Options are contracts / agreements between 2 people. So the value of futures and options is derived from their underlying product/assets on which contract is made. The underlying asset may be a land, gold, share or any product/service. So whenever the price of the underlying rises, the price of futures and options also rises, and whenever the price of the underlying falls, the price of futures and options will also fall.

There are 3 types of futures and options in stock market:

  • Equity Futures & Options
  • Currency Futures & Options
  • Commodity Futures & Options

Confused? Let’s understand Futures and Options in detail below:

Futures

It is a contract between people to buy or sell a particular stock, commodity or any product at a fixed price on a future date.

Let’s look at the example below:

  • Dev and Ram are best friends.
  • Dev owns a bike showroom. 
  • Ram entered into a contract with Dev to buy a bike worth 1 Lakh in the next 3 months.

Why does Ram enter into a contract with Dev to buy the bike in 3 months instead of directly buying it right away?

Here’s why: Ram is currently short of funds and thinks the price of the bike will rise in the next 3 months. On the other hand, Dev agrees to enter into a contract as he thinks the bike prices may drop.

In the next 3 months, 1 of the following things may happen: 

  1. The price of the bike might increase to ₹ 1,20,000 and Dev might incur a loss of ₹ 20,000.
  2. On the other hand, the price of the bike might decrease to ₹ 75,000 and Ram might incur a loss of ₹ 25,000.
  3. Or the price of the bike might remain the same. (no profit, no loss)

In the Futures Contract, both Dev and Ram cannot pull out of the contract for next 3 months. Doing so will lead to legal implications from either of the parties.

Similarly, in the stock market, investors buy stock futures if they expect the price of the stock to increase in the future and short sell if they expect the price of the stock to decrease in the future. Both profits & losses are unlimited in futures contracts.

Unlike the Dev and Ram scenario, in Stock Market Futures Contract, one can exit anytime they want by booking the profits or losses.

To get a complete understanding of The Futures Contract, click on this link to read the detailed article. 

Options

Options contracts are similar to Futures but with some differences. The difference can be better understood if we learn about Options Buying and Options Selling separately.

Option Buying: Unlike Futures Contract, here you will have to pay only the advance amount (premium) to enter into the contract and if the trade goes against you, you will lose the advance amount (premium) only. On the contrary, if the trade goes in your favor, you will make unlimited profits.

Option Selling: Here, you will receive the premium from the option buyer and the profits will be limited to the premium received only. On the contrary, if the trade goes against you, your losses will be unlimited.

Let’s consider the Ram & Dev scenario again: Ram enters into an Options Contract with Dev to buy a bike worth ₹ 1 lakh in the next 3 months, but this time pays an advance of ₹ 10,000 (Premium) to book the bike.

In the next 3 months, 1 of the following things may happen:

  • The price of the bike might increase to ₹ 1,20,000 and Dev might incur a loss of ₹ 20,000.
  • On the other hand, the price of the bike might decrease to ₹ 75,000 and Ram might incur a loss of ₹ 10,000. (If he pulls out of the agreement)
  • Or the price of the bike might remain the same. (no profit, no loss)

Here’s the main difference between a Futures and Options Contract: In Options Contract, if Ram feels that the prices are gonna drop, he can pull out of the contract, and by doing so he will lose only the advance amount i.e. ₹ 10,000 but Dev does not have any such option of pulling out of the contract.

To get a complete understanding of The Options Contract, click on this link to read the detailed article. 

There is one more thing that you need to know about before moving forward. Click here to learn about what is hedging in the stock market.

Futures vs Options

Check out the difference between Futures and Options in the Tabular Form below: 

  Futures Options Buying Options Selling
Meaning It is a contract between people to buy or sell a particular stock/commodity at a fixed price on a future date.
Obligation Both buyer and seller are obligated to buy & sell at an agreed price. Option Buyer is not obligated as he takes the risk by paying a premium or advance amount before entering into the contract. Option Seller is obligated as he receives the premium or advance amount before entering into the contract.
Advance Payments No advance payments. Pays advance payment. Receives advance payment.
Money Required Requires a higher amount of money. Requires only a premium amount. Requires a higher amount of money.
Execution Any date before the expiry. Any date before the expiry. Any date before the expiry.
Profit Unlimited profit. Unlimited profit. Limited profit.
Loss Unlimited loss. Limited loss. Unlimited loss.
Risk High. Limited to the premium paid. High.

NSE Futures and Options Stock List

Check out the list of all Futures and Options Contracts listed on National Stock Exchange (NSE) below:

UNDERLYINGSYMBOL
Nifty 50NIFTY
Nifty BankBANKNIFTY
Derivatives on Individual Securities
ACC LIMITEDACC
ADANI ENTERPRISES LIMITEDADANIENT
ADANI PORTS AND SPECIAL ECONOMIC ZONE LIMITEDADANIPORTS
AMARA RAJA BATTERIES LIMITEDAMARAJABAT
AMBUJA CEMENTS LIMITEDAMBUJACEM
APOLLO HOSPITALS ENTERPRISE LIMITEDAPOLLOHOSP
APOLLO TYRES LIMITEDAPOLLOTYRE
ASHOK LEYLAND LIMITEDASHOKLEY
ASIAN PAINTS LIMITEDASIANPAINT
AUROBINDO PHARMA LIMITEDAUROPHARMA
AXIS BANK LIMITEDAXISBANK
BAJAJ AUTO LIMITEDBAJAJ-AUTO
BAJAJ FINANCE LIMITEDBAJFINANCE
BAJAJ FINSERV LIMITEDBAJAJFINSV
BALKRISHNA INDUSTRIES LIMITEDBALKRISIND
BANDHAN BANK LIMITEDBANDHANBNK
BANK OF BARODABANKBARODA
BATA INDIA LIMITEDBATAINDIA
BERGER PAINTS (I) LIMITEDBERGEPAINT
BHARAT ELECTRONICS LIMITEDBEL
BHARAT FORGE LIMITEDBHARATFORG
BHARAT PETROLEUM CORPORATION LIMITEDBPCL
BHARTI AIRTEL LIMITEDBHARTIARTL
BHARTI INFRATEL LIMITEDINFRATEL
BHARAT HEAVY ELECTRICALS LIMITEDBHEL
BIOCON LIMITEDBIOCON
BOSCH LIMITEDBOSCHLTD
BRITANNIA INDUSTRIES LIMITEDBRITANNIA
CADILA HEALTHCARE LIMITEDCADILAHC
CANARA BANKCANBK
CHOLAMANDALAM INVESTMENT AND FINANCE COMPANY LIMITEDCHOLAFIN
CIPLA LIMITEDCIPLA
COAL INDIA LIMITEDCOALINDIA
COLGATE PALMOLIVE (INDIA) LIMITEDCOLPAL
CONTAINER CORPORATION OF INDIA LIMITEDCONCOR
CUMMINS INDIA LIMITEDCUMMINSIND
DABUR INDIA LIMITEDDABUR
DIVI’S LABORATORIES LIMITEDDIVISLAB
DLF LIMITEDDLF
DR. REDDY’S LABORATORIES LIMITEDDRREDDY
EICHER MOTORS LIMITEDEICHERMOT
ESCORTS LIMITEDESCORTS
EXIDE INDUSTRIES LIMITEDEXIDEIND
THE FEDERAL BANK LIMITEDFEDERALBNK
GAIL (INDIA) LIMITEDGAIL
GLENMARK PHARMACEUTICALS LIMITEDGLENMARK
GMR INFRASTRUCTURE LIMITEDGMRINFRA
GODREJ CONSUMER PRODUCTS LIMITEDGODREJCP
GODREJ PROPERTIES LIMITEDGODREJPROP
GRASIM INDUSTRIES LIMITEDGRASIM
HAVELLS INDIA LIMITEDHAVELLS
HCL TECHNOLOGIES LIMITEDHCLTECH
HDFC BANK LIMITEDHDFCBANK
HOUSING DEVELOPMENT FINANCE CORPORATION LIMITEDHDFC
HDFC LIFE INSURANCE COMPANY LIMITEDHDFCLIFE
HERO MOTOCORP LIMITEDHEROMOTOCO
HINDALCO INDUSTRIES LIMITEDHINDALCO
HINDUSTAN PETROLEUM CORPORATION LIMITEDHINDPETRO
HINDUSTAN UNILEVER LIMITEDHINDUNILVR
ICICI BANK LIMITEDICICIBANK
ICICI PRUDENTIAL LIFE INSURANCE COMPANY LIMITEDICICIPRULI
INFO EDGE (INDIA) LIMITEDNAUKRI
VODAFONE IDEA LIMITEDIDEA
IDFC FIRST BANK LIMITEDIDFCFIRSTB
INDIABULLS HOUSING FINANCE LIMITEDIBULHSGFIN
INDIAN OIL CORPORATION LIMITEDIOC
INDRAPRASTHA GAS LIMITEDIGL
INDUSIND BANK LIMITEDINDUSINDBK
INFOSYS LIMITEDINFY
INTERGLOBE AVIATION LIMITEDINDIGO
ITC LIMITEDITC
JINDAL STEEL & POWER LIMITEDJINDALSTEL
JSW STEEL LIMITEDJSWSTEEL
JUBILANT FOODWORKS LIMITEDJUBLFOOD
KOTAK MAHINDRA BANK LIMITEDKOTAKBANK
L&T FINANCE HOLDINGS LIMITEDL&TFH
LARSEN & TOUBRO LIMITEDLT
LIC HOUSING FINANCE LIMITEDLICHSGFIN
LUPIN LIMITEDLUPIN
MAHINDRA & MAHINDRA FINANCIAL SERVICES LIMITEDM&MFIN
MAHANAGAR GAS LIMITEDMGL
MAHINDRA & MAHINDRA LIMITEDM&M
MANAPPURAM FINANCE LIMITEDMANAPPURAM
MARICO LIMITEDMARICO
MARUTI SUZUKI INDIA LIMITEDMARUTI
MAX FINANCIAL SERVICES LIMITEDMFSL
MINDTREE LIMITEDMINDTREE
MOTHERSON SUMI SYSTEMS LIMITEDMOTHERSUMI
MRF LIMITEDMRF
MUTHOOT FINANCE LIMITEDMUTHOOTFIN
NATIONAL ALUMINIUM COMPANY LIMITEDNATIONALUM
NESTLE INDIA LIMITEDNESTLEIND
COFORGE LIMITEDCOFORGE
NMDC LIMITEDNMDC
NTPC LIMITEDNTPC
OIL & NATURAL GAS CORPORATION LIMITEDONGC
PAGE INDUSTRIES LIMITEDPAGEIND
PETRONET LNG LIMITEDPETRONET
PIDILITE INDUSTRIES LIMITEDPIDILITIND
PIRAMAL ENTERPRISES LIMITEDPEL
POWER FINANCE CORPORATION LIMITEDPFC
POWER GRID CORPORATION OF INDIA LIMITEDPOWERGRID
PUNJAB NATIONAL BANKPNB
PVR LIMITEDPVR
RBL BANK LIMITEDRBLBANK
RELIANCE INDUSTRIES LIMITEDRELIANCE
REC LIMITEDRECLTD
SHREE CEMENT LIMITEDSHREECEM
SHRIRAM TRANSPORT FINANCE COMPANY LIMITEDSRTRANSFIN
SIEMENS LIMITEDSIEMENS
SRF LIMITEDSRF
STATE BANK OF INDIASBIN
SBI LIFE INSURANCE COMPANY LIMITEDSBILIFE
STEEL AUTHORITY OF INDIA LIMITEDSAIL
SUN PHARMACEUTICAL INDUSTRIES LIMITEDSUNPHARMA
SUN TV NETWORK LIMITEDSUNTV
TATA CHEMICALS LIMITEDTATACHEM
TATA CONSULTANCY SERVICES LIMITEDTCS
TATA CONSUMER PRODUCTS LIMITEDTATACONSUM
TATA MOTORS LIMITEDTATAMOTORS
TATA POWER COMPANY LIMITEDTATAPOWER
TATA STEEL LIMITEDTATASTEEL
TECH MAHINDRA LIMITEDTECHM
THE RAMCO CEMENTS LIMITEDRAMCOCEM
TITAN COMPANY LIMITEDTITAN
TORRENT PHARMACEUTICALS LIMITEDTORNTPHARM
TORRENT POWER LIMITEDTORNTPOWER
TVS MOTOR COMPANY LIMITEDTVSMOTOR
ULTRATECH CEMENT LIMITEDULTRACEMCO
UNITED BREWERIES LIMITEDUBL
UNITED SPIRITS LIMITEDMCDOWELL-N
UPL LIMITEDUPL
VEDANTA LIMITEDVEDL
VOLTAS LIMITEDVOLTAS
WIPRO LIMITEDWIPRO
ZEE ENTERTAINMENT ENTERPRISES LIMITEDZEEL
ICICI LOMBARD GENERAL INSURANCE COMPANY LIMITEDICICIGI

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:

Market What is Primary Market?
Difference between IPO and FPO
Bull vs Bear Market
Trading What is Online Trading?
What is Algo Trading?
Investment What is Bonus Share?
What is Valuation of Shares?
What is Corporate Action?
Analysis Stock Market Analysis
Individual Topics What are CTT & STT Charges?
India Vix
Difference between FDI and FII
Account What is Trading Account
What is Demat Account

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