buyer of an option (the long position) has the right but not the obligation
to enter into a transaction. The option writer is obligated to transact
if the buyer so desires (i.e., exercises the option). In contrast, both
parties are obligated to perform in the case of a futures contract.
In addition, to establish a position, the party who is long futures does not
pay the party who is short futures. In contrast, the party long an option
must make a payment (the option price) to the party who is short the
option in order to establish the position.
The payout structure also differs between a futures contract and an
option contract. The option price represents the cost of eliminating or
modifying the risk/reward relationship of the underlying. In contrast,
the payout for a futures contract is a dollar-for-dollar gain or loss for
the buyer and seller. When the futures price rises, the buyer gains at the
expense of the seller, while the buyer suffers a dollar-for-dollar loss
when the futures price drops.
Thus, futures payouts are symmetrical, while options are skewed.
The maximum loss for the option buyer is the option price. The loss to
the futures buyer is the full value of the contract. The option buyer has
limited downside losses but retains the benefits of an increase in the
value of the underlying. The maximum profit that can be realized by the
option writer is the option price, but there is significant downside exposure.
The losses or gains to the buyer and seller of a futures contract are
completely symmetrical.
Read More : Differences Between Options and Futures
