How are options different from futures?

How Are Options Different From Futures?

Options and futures are both derivatives, but they differ in obligations, risk profiles, margin treatment, and settlement mechanics. Use this article to compare them side-by-side and choose the instrument that best matches your view and risk tolerance in the Indian (NSE) market.

Overview

  • Futures = obligation on both sides. If you hold a futures position to expiry, you must settle; profit/loss is realised daily through mark-to-market (MTM).
  • Options = right for the buyer, obligation for the seller. Buyers pay a premium for the right (not obligation); sellers receive premium but must meet margin and assignment risk.
  • Settlement differs by product. Index derivatives are cash-settled; stock derivatives can involve physical delivery at expiry when positions finish in-the-money (ITM).

Quick Comparison

TopicFuturesOptions (Buyer)Options (Seller/Writer)
ObligationLong/short both obligated; position MTM’d daily.No obligation; can let expire.Obligated if assigned at expiry.
Risk/P&L shapeLinear; gains/losses can be large in either direction.Loss capped at premium; upside: call = theoretically unlimited, put = up to underlying → 0.Potentially large (short calls unlimited; short puts large down to 0).
Upfront cashMargins required (e.g., SPAN/PRISM + exposure).Pay premium; no margin.Margins required; may rise with volatility/Greeks.
Daily cashflowsMTM credits/debits (T+1).Premium settlement only; no MTM.Premium received; margin/variation flows as applicable.
Expiry/exerciseFinal P/L cash-settled on expiry.European exercise at expiry; ITM usually exercised automatically.May be assigned at expiry (European).
Settlement – IndexCash-settled.Cash-settled.Cash-settled if assigned.
Settlement – Stock F&OPhysical delivery at expiry.Physical delivery if ITM at expiry.Physical delivery/receipt if assigned ITM at expiry.
Typical use casesDirectional trades, hedging inventory, calendar spreads.Defined-risk directional views, event hedges, portfolio insurance.Income/volatility strategies (covered calls, credit spreads) with risk controls.

How to choose?

  1. Define your risk cap: If you need a pre-defined maximum loss, prefer buying options; if you’re comfortable with linear risk, futures (or option spreads) may fit.
  2. Decide on obligation tolerance: If you don’t want assignment/delivery risk, avoid holding stock F&O positions into expiry; square off or roll.
  3. Match to your view:
    • Futures - strong directional view with linear payoff.
    • Buy Calls/Puts - directional view with limited downside.
    • Credit/Debit Spreads - defined-risk income or directional adjustment.
    • Iron Condors - range-bound or volatility-compression views.
  4. Check margins & liquidity: Ensure the required margin (or premium outlay) and contract liquidity suit your size.
Near expiry, stock F&O can trigger physical delivery and short options carry large downside—prefer defined-risk spreads and always recheck current contract specs before trading.

What If...

ScenarioSolution
Sharp intraday moveTrim size or convert to defined-risk spreads.
Hold index position to expiryClose or roll before expiry to avoid auto exercise/assignment.
Hold stock position to expirySquare off/roll to avoid delivery, or keep funds/holdings ready.

Last updated: 04 Nov 2025

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