Futures vs options: what are the key differences?

What’s the difference between futures and options?

Futures and options are both financial contracts used to trade on a wide variety of markets.

Both futures and options are leveraged instruments with expiry dates. For futures, you’d settle the difference between the contract's opening and closing price at expiry.

For options, if held to expiry, the profit or loss is determined by the difference between the underlying asset's price at expiry and the option's strike price, not the opening and closing prices of the option itself. If you close an option before its expiry, your profit or loss is based on the difference in premium paid and received.

It's important to note that, while trading leveraged derivatives can amplify profits, it can also magnify losses. That’s because both are based on the full value of the trade, not the margin used to open it. If the market moves against you, you may lose more than your original deposit. It’s important to manage your risk when trading leveraged derivatives.

You can trade options and futures with us. Here's how:

1. Options: get direct access to US-listed options traded on exchange. This gives you exposure to options in their pure form. You can also trade options over the counter (OTC) using spread bets and CFDs. Here, you won't actually be buying or selling options contracts; you'll only be trading on their price movements

2. Futures: trade US-listed futures on exchanges. These futures contracts are financially settled, not physically delivered. Before the first notice date, you must roll your positions over to the next contract. We’ll close any positions that haven’t rolled over. You can also trade futures via spread bets and CFDs. With spread bets and CFDs, you don't own the underlying contracts outright

What are futures?

Futures are derivative financial contracts between a buyer and a seller, in which they both agree on a price and expiry date to exchange an underlying asset for. When these two parties enter a futures contract, the buyer is obligated to buy the underlying asset, and the seller is obligated to sell it, at or before the contract’s predetermined expiry date and strike price.

Futures are often used to hedge against anticipated but undesirable price changes in an underlying market to protect against losses. For example, a company may buy futures in a specific commodity to hedge against the possibility of said commodity’s price rising.

This is because buying a commodity’s futures contract means companies can lock in a price, and the price for the futures contract will remain the same – even if the underlying commodity’s price rises.

Learn more about futures trading

What are options?

Options are financial derivative contracts that give the buyer the right to buy or sell an underlying asset at a predetermined price on or before the expiry, which is agreed upon between the buyer and the seller. The buyer will pay a premium – also known as the margin – for each contract. The margin is influenced by multiple factors, including the time until expiration, the strike price, the current price of the underlying asset, market volatility and even interest rates.

Unlike with futures, market participants who buy options contracts are under no obligation to sell or buy the underlying asset when the contract expires (or if the strike price moves beyond the price range before the expiry). They can simply choose to pay the premium and not exercise their right to buy or sell.

You can buy or sell options if you believe a market’s price will rise or fall. You can purchase an option to buy – known as a call option – if you think the market will rise. If you think the market will fall, you can buy an option to sell – known as a put option.

Learn more about options trading

Futures vs options: how to trade

You can trade US-listed options and futures with us or speculate on options and futures via spread betting and CFD trading.

Day traders might prefer to trade spread bets and CFD spot markets, as these typically have tighter spreads compared to futures contracts.

However, it's important to note that spot trades incur overnight funding charges if positions are held beyond 10pm UK time. Futures trades don’t have these overnight charges but may have wider spreads.

Here's a comparison of the different ways to trade futures and options:

Interested? Open a live account if you’re feeling confident.

We also offer spot trading, which enables you to trade on the current market price of an underlying asset with no fixed expiry date. Spot positions have tighter spreads, but they also require you to pay overnight funding. This makes spot trading preferred by intraday traders.

Benefits and risks of futures trading (spread betting and CFD trading accounts)

Benefits of trading futures using derivatives:

• Pay no capital gains tax or stamp duty¹

• Gain access to 24-hour dealing

• Get no commission, just our spread

• Trade with leverage for greater market exposure with less capital

• Enjoy no overnight funding charges

• Speculate on long-term market movements

• Hedge against volatility

• Find deep internal liquidity and ensure best execution no matter the expiry

Risks of trading futures using derivatives:

• If the market moves against you, you may lose more than the initial deposit

• Leverage can potentially amplify your profits and your losses

• Requires active management and monitoring

• Market volatility can lead to significant price swings

Benefits and risks of options trading

Benefits of trading options:

• Trade with leverage in a margin account²

• Flexibility in trading strategies (calls, puts, spreads)

• Potential to generate income (premiums received) when selling listed options

• Can be used for hedging or speculating

• Ability to profit from price movements without owning the underlying asset

Risks of trading options:

• Complex strategies can be difficult to understand and implement

• Time decay works against option buyers

• Requires understanding of various factors affecting option prices (time value, volatility, etc)

• Lower liquidity in some options markets compared to the underlying assets

Unsure of where to start? Try our spread betting and CFD demo trading account. You’ll be able to familiarise yourself with the nuances of trading not only futures and options over the counter, but spread bets and CFDs as well – with £10,000 in virtual funds.

Our friends at tastytrade offer comprehensive educational resources tailored specifically for US-listed options and futures. You’ll find in-depth tutorials, webinars, and strategy guides to help you understand and navigate the intricacies of US options trading. Or dive into our wealth of informative content on IG Academy and learn all about trading.

Futures vs options summed up

• Both futures and options are financial contracts used to speculate on a market’s price movements

• Futures and options differ in their contractual requirements. With futures you’re required to settle your trade in full, but with options you can choose to pay the premium, but not exercise the option

• You can trade listed options and futures with us, or trade on options and futures using spread bets and CFDs

• All forms of leveraged trading carry risk, including trading on futures and options

Footnotes

¹ Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK
² Leveraged products are complex financial instruments, with which an upfront deposit – called margin or buying power – is used to open a larger trade. Your margin will only be worth a certain percentage of your trade, but potential profits and losses will be calculated based on the total position size, not your margin. This makes leveraged trading inherently risky and should never be approached without a trading strategy and adequate risk management in place. When trading in an OTC account with us (ie spread betting or CFD trading), you’ll use leverage. With us, you’ll trade listed futures in a margin account. You’ll trade listed options in a margin or cash account. When you trade in a margin account, you’ll have more strategies available to you – eg selling naked call options and defined-risk options spreads. Options positions aren’t fully cash-secured (eg you aren’t necessarily required to put up the buying power in full upfront) in a margin account. In a cash account, options trading is non-marginable (ie you can’t borrow cash to establish positions, so you’ll commit the full value of your trade upfront).