Futures vs options

Futures are an obligation (that you get out of by closing the trade) to buy or sell the underlying asset in the future to another party, whereas buying an option provides the right – not the obligation – to buy or sell the underlying asset at a future date.

With a futures contract​, a trader pays the current price of the contract but doesn’t have to take delivery or receive the underlying asset until later. They can buy an asset today to be delivered to them in six months. If the price is higher in six months, they would profit for locking in a lower price. If the price is lower in six months, they would incur losses because they paid a higher price than needed.

Meanwhile, buying an option is used if a trader may want to buy or sell the underlying asset in the future. Assume a trader buys an option with a chosen strike price (the price at which a contract can be exercised or settled against) and expiry. If the price of the underlying asset is above the strike price for a call option or below the strike price for a put option, they have the right to buy (use a call option) or short (sell a put option) the asset at the strike price. But upon taking the trade, they are not obligated to buy at the strike price.

Futures traders tend to buy a contract if they think the underlying asset will rise. Otherwise, they could short sell (before buying) the contract if they think the underlying asset will fall. Learn how to short a stock​ with our detailed guide.

Options are divided into puts and calls. A trader can buy a put if they expect the price of the underlying to drop before expiry. If they expect the price of the underlying to rise before expiry, they can buy a call.

Futures expiry dates can be many years in the future, usually expiring on the same day each month or quarter, whereas option expiry dates are typically a year or less; usually weekly, monthly or quarterly, depending on the underlying market. Options that expire more than a year into the future are called long-term equity anticipation securities.

Futures speculators aren’t usually interested in delivering or receiving the underlying asset, as they are more interested in participating in the price changes. If a trader believes an asset’s price will be higher in a day, week, month, or year, they could buy a futures contract on the spot. If they are right, and the price is higher in the future, they could sell their contract before expiry and profit from the price difference.

Speculators tend to close their trade before the contract expires, otherwise they are obligated to deliver or receive the underlying asset or settle the value of the contract in cash.

As for options, if a trader believes a stock may move up to £65, say, over the next six months and it is at £60 right now, they may choose to buy an option contract for £1 (called the premium), that gives them the right to buy the stock at £60 (the strike price) for the next six months.

If the underlying stock goes to £65, they could use their option to buy the stock at £60 and then sell the shares at the current price of £65, reaping a profit (less than the cost of the option). Or they could sell the option and reap a profit of approximately £4 because the option provides a profit of £5 (£65-£60, less the £1 paid for the option). If the stock drops, they could do nothing and lose the £1 paid for the option. They can also sell the option before expiry to potentially recoup part of the premium cost.

In order to prevent future losses, some traders use controls such as a stop-loss order​​, as the price can rise or fall indefinitely (even below zero). Since a futures contract is an obligation, that obligation persists regardless of price until the obligation/trade is closed.

When buying an option, the maximum loss is the cost of the premium paid no matter how much the underlying asset price moves.

Futures are often traded using leverage​, which means controlling a lot of underlying assets with a small amount of cash. With options, you pay a premium to potentially see a profit or loss on price movements of the underlying asset.

For futures, a trader is required to have only a small portion of the value of the underlying asset in their account. For example, a forward contract (that we offer as an alternative to futures; see below for more about this product) is very similar to a futures contract, and the trader is required to have only 5% of the bet size in their account. Trading a contract worth £1,000 of underlying product requires only £50 in the account to initiate the trade.

With options, a trader may buy, say, three £3 option contracts on a £70 stock for £900. This means they have the potential to control 300 shares of stock (100 shares per contract). The stock has a value of £21,000 (300 x £70). This is like leverage, but unlike a future, the options trader owns only the option and is not obligated to buy the £21,000 worth of stock.