Difference Between Futures and Options

What is the difference between futures and options?

Futures and options are present in the daily life of citizens who, intuitively, make different valuations of this type of contract. We refer to cases as close as agreeing on a deferred price in the sale of a home or taking out insurance on our house or our car. However, when talking about options and futures referring to the financial markets, it is often considered that it is something far from our reality, when many investors without operating directly on them, have or have been able to have among their active these types of contracts without knowing it. In particular, it may have occurred if they have entrusted portfolio management to a professional, establishing a limit on the aggregate risk of the investment, they have subscribed to guaranteed investment funds, etc. 

The role that these instruments play in investment management is unquestionable. The results offered by many products that you can find in the market are frequently achieved —although not always, since in certain circumstances it is possible to reproduce their effects in the cash market— by buying, selling or carrying out multiple strategies in the cash market. derivatives. From all this arises the importance of knowing the main concepts, their basic operation, and how risk is transferred between market participants, regardless of whether or not they decide to operate directly with options and futures. because in certain circumstances it is possible to reproduce its effects in the spot market—buying, selling, or carrying out multiple strategies in the derivatives market. From all this arises the importance of knowing the main concepts, their basic operation, and how risk is transferred between market participants, regardless of whether or not they decide to operate directly with options and futures. because in certain circumstances it is possible to reproduce its effects in the spot market—buying, selling, or carrying out multiple strategies in the derivatives market. From all this arises the importance of knowing the main concepts, their basic operation, and how risk is transferred between market participants, regardless of whether or not they decide to operate directly with options and futures.

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What are futures?

A future is a forward contract traded on an organized market, by which the parties agree to buy and sell a specific quantity of security (underlying asset) on a predetermined future date (settlement date), at a price agreed in advance (future price). In other words, these are term contracts whose objects are instruments of a financial nature (securities, indices, loans, or deposits…) or “commodities” (that is, merchandise such as agricultural products, raw materials…). These types of contracts are traded on organized markets, therefore, they can be bought or sold at any time during the trading session without having to wait for the expiration date. Both to buy and to sell futures, the participants must provide guarantees to the market, that is, an amount —determined based on the open positions they hold— as a sign of compliance with their commitment, so as to avoid counterparty risk. The investor in futures must bear in mind that it is possible to sell a future without having bought it before since what is being sold is the position in the contract for which the seller assumes an obligation. This is what the market calls ‘going short’ or ‘going short’.

What are the options?

An option is a contract that gives its buyer the right, but not the obligation, to buy or sell a certain amount of the underlying asset, at a certain price called the exercise price, in a stipulated period of time or expiration. In options, since they are contracts and not securities, it is not necessary to buy first to later sell, but rather it is possible to sell first and, where appropriate, then buy. It is therefore essential to distinguish between the situation of the buyer and that of the seller. The buyer of an option has the right, but not the obligation, to buy or sell (depending on the type) at expiration; Rather, the seller of the option is obligated to buy or sell if the buyer decides to exercise the right of it. Upon expiration date, the buyer will decide whether or not he is interested in exercising his right, based on the difference between the price set for the transaction (exercise price or strike) and the price of the underlying asset on the cash market at that time (in the case of shares, its price). The price of the option is what the buyer pays to obtain that right and is called the premium. The premium is really the object of negotiation. The buyer of options has only rights and no obligation, therefore his losses are limited to the premium paid —with this position he has sold the risk to a third party—. In contrast, the option seller collects the premium, but has only obligations and assumes the possibility of incurring unlimited losses. Therefore, the seller of the option always keeps the premium,

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