Futures vs Options: F&O Basics and Motilal Oswal Curb
Why in the news
With markets down for five straight months, Motilal Oswal Financial Services decided to stop clients from taking intraday short positions in non-F&O stocks. It is the first big brokerage to do so, and it had 10.3 lakh clients in January-end.
About F&O
Futures and options are derivatives used to hedge risk, speculate and diversify portfolios.
- Futures: a binding contract to buy or sell an asset at a fixed price on a set future date. Both sides must honour it. If prices rise above the agreed level the buyer gains; if they fall, the seller gains.
- Options: give the buyer a right, not an obligation, to buy (Call) or sell (Put) at a preset price on or before expiry. A call pays when prices rise, a put when they fall.
- An option buyer’s maximum loss is the premium paid; the seller (writer) can face unlimited loss.
Futures versus options
| Point | Futures | Options |
|---|---|---|
| Obligation | Both parties must settle | Buyer may choose; seller bound if exercised |
| Risk | Unlimited for both | Limited for buyer, unlimited for seller |
| Flexibility | None, settle at expiry | High; may lapse worthless or be exercised |
| Cost | Margin, no premium | Buyer pays premium |
| Seller’s gain | Depends on price move | Limited to premium |
Benefits and risks
- Benefits: leverage, protection against adverse price moves, high liquidity in major markets.
- Risks: extreme volatility can cause heavy losses; a plan and market understanding are needed; margin calls often signal financial distress.
Exam angle
- Call = right to buy; Put = right to sell.
- Option buyer’s maximum loss = premium.
- Futures need margin; options need premium from the buyer.