Options and futures belong to the same type of financial instruments because of the many similarities that exist between them. However, they are totally different to each other in performance and present traders with distinctly separate ways of investing.
Options and futures both refer to financial instruments that are to be executed at a future date. Options are based upon the underlying asset and have a strike price and an expiration date. A trader is given the right to buy or sell the underlying asset at a pre-set price before a date agreed upon by both parties although he is not under obligation to do so. A buyer who believes that the price of the underlying asset will go up will try to purchase it with a call option at a lower price after paying a premium for gaining the right to do so. A put option gives the trader the right but not the obligation to sell the underlying asset at the agreed price on or before the expiration date.
Options and futures have many differences as well. A futures contract is not flexible as an options contract in that it requires the trader to either buy or sell as agreed upon under the terms of the contract if the position is not offset prior to expiration. This means, that the trader is under obligation to perform the contract.
Futures have unlimited risk attached to them while options tend to limit the risk on positions. The option trader has the right to trade the option without being under obligation to do so while the futures trader is under an obligation to perform in accordance with the terms of the contract. An option is not directly tied to the underlying asset unlike in a futures contract where it is tied to the value of the product. Payment is another area where options and futures are set apart. A futures contract requires no up-front payment or cost while an option is purchased with the payment of a premium at the outset.
Options can be exercised at any time during the lifetime of the option or at the end on the expiration date. In a futures contract the trader has to wait till the end of the contract which is the delivery date or the settlement date when he is under obligation to make or take delivery of the settlement.
It is useful for cfd traders to understand the difference between an option and a futures contract. These are financial instruments that yield profits when handled with knowledge and proper monitoring.