Options vs Futures: Derivatives Basics

Both options and futures are derivative contracts — their value derives from an underlying asset.

Futures: The Obligation

A futures contract is an agreement to buy or sell at a set price on a set future date. Both parties are obligated.

`` Buy 1 ES futures at 5,000 expiring March 2027

• If S&P at expiration is 5,200: profit ~$10,000
• If S&P at expiration is 4,800: loss ~$10,000

``

Highly leveraged.

Options: The Right, Not Obligation

A call option gives the right (not obligation) to buy at a set price. A put gives the right to sell. You pay a premium upfront.

Maximum loss is the premium paid.

Cost Structure

| | Futures | Options | |--|---------|---------| | Upfront cost | Margin | Premium | | Time decay | Minimal | Significant | | Leverage | Very high | Moderate to very high | | Max loss | Theoretically unlimited | Premium paid (long) |

Use Cases

Futures: Hedge commodities, index speculation, 24-hour markets. Options: Define max loss, generate income (covered calls), hedge downside (protective puts), express volatility views.

The Greeks

Options pricing depends on five factors: delta, gamma, theta, vega, rho.

Risk

Beginners selling naked options or oversizing futures positions can lose multiples of their account in a single day.

Educational only. Not financial advice. Derivatives carry high risk.