Options vs Futures and Futures vs Forwards

• An option is binding only for the seller. The buyer has the right to sell (in case of a put option) or to buy (in case of a call option) the underlying from the seller.
• The option buyer pays a premium to the issuer and therefore gets the right to sell(put)/buy(call) the underlying at the option strike price
• An option is deriving its value (to a big extent) from an underlying.
• An option is a conditional contract – A Future is an unconditional contract
• There are options that are traded on exchanges as well as options that are not traded on an exchange.
• Options can be standardized as well as unstandardized
• You can buy an American option or a European option. While a European option could only be exercised at a specified maturity date an American option can be exercised during the whole term.
• Some options are settled in cash and some are settled by delivering the underlying
• An underlying for an option could be either a spot market instrument or a derivative.

Option buyer (long)	Option issuer (short)
Call: He will exercise option if prices of underlying rise	He believes prices of underlying will fall or stay the same. If the prices rise and the option buyer exercises his option the issuer muss sell him the goods for the previously specified strike price
Put: He will exercise option if prices of underlying fall	He believes prices of underlying will increase or stay the same. If the prices fall and the option buyer exercises his option the issuer must buy the goods from the option holder for the specified strike price

Futures vs Forwards

Both Futures and Forwards are binding for both trade partners. They agree on an exercise price and a delivery in the future

Futures	Forwards
Standardized (few contract types, fixed quantities as well as fixed delivery dates, fixed place, fixed underlying, fixed price)	OTC traded
Very liquid	individualy adjustable , therefore less liquid
Traded on a futures exchange	higher counterparty risk
Trades are guaranteed by the futures exchange – exchange offers efficient pricing – exchange offers daily resettlement,