Question

Explain the difference between options and futures.

Answer 1

An option gives the buyer the right, but not the obligation, to buy (or sell) a certain financial asset at a specific price at any time before or on a specified date.

A futures contract is a binding agreement which gives the buyer the obligation to purchase (or sell) a specific financial asset at a specific future date at a pre-determined price.

The key difference between futures and options is the obligation to buy or sell. In options there is no obligation but in futures there is an obligation, it is a legally binding contract. Futures contract can be executed only on a specific date but options can be executed anytime before or on a specified date.