Sonith ManakkatShares, futures and options are often mentioned in one breath, but they are different kinds of thing. One is a piece of ownership, one is a binding promise, and one is a right that can be bought or an obligation that can be taken on. This part compares them side by side, with plain pictures first and an Expert view after each. All numbers are illustrative.
Three different things
Expert viewUnderlying and derivative
A share is the underlying asset in this comparison. Futures and options are derivatives: their value is derived from an underlying asset, index or rate. A futures contract is an obligation for both sides to trade at an agreed price on a set date (some settle by delivery, others by paying the cash difference). An option gives the buyer a right and the seller an obligation. Both are standardised contracts with fixed size and expiry dates set by the venue where they trade.
Side by side
| Feature | Share | Futures contract | Option |
|---|---|---|---|
| What you hold | Ownership | An obligation | A right (buyer) or obligation (seller) |
| Expiry | None | Yes | Yes |
| Leverage | None by default | Built in | Built in |
| Money needed up front | Full price | A deposit (margin) | Premium (buyer) or margin (seller) |
| Worst loss, long side | Can fall to zero | Can exceed the deposit | Limited to the premium (buyer) |
| Worst loss, short side | Can be large if sold short | Can exceed the deposit | Not limited (seller of a call) |
| Typical use | Ownership | Hedging or speculation | Hedging or speculation |
Futures contract
- Both sides must go through with it
- Loss can grow beyond the deposit
Option (buyer)
- The buyer chooses whether to use it
- The buyer's loss is limited to the premium paid
The maximum loss, stated plainly
- Share held outrightThe price can fall to zero, so the whole amount paid can be lost
- Futures positionA loss can be larger than the deposit put up
- Option boughtLoss limited to the premium paid, which can be the whole premium
- Option soldLoss can far exceed the premium received
Expert viewWhy a limit is not the same as low risk
A limited loss does not mean a small or unlikely loss. An option buyer who pays a premium of 5 on a share priced at 100 (illustrative) risks 5, but that is the entire amount paid, and options near expiry can lose most of their value without the underlying moving much. Meanwhile a futures position has no premium: every unit of adverse price movement is a loss, and because only a deposit was paid, the loss can pass the deposit and the holder must cover the gap.
Leverage and margin
- DepositA fraction of the contract's value is put up as a good-faith deposit
- Value movesGains and losses are counted against the deposit, often every day
- Top-up requestIf the deposit shrinks too far, more must be added
- Forced closeIf it is not added, the position can be closed, locking in the loss
Takeaway. The deposit is a cushion that is checked as prices move, and it can be asked to refill.
- 10a deposit of 10 controls a contract worth 100
- 10a 10 percent adverse move uses up the whole deposit
- First 3 percent fall A loss of 3, which is 30 percent of the deposit.
- Next 4 percent fall The loss reaches 7, with 3 of the deposit left.
- Last 3 percent fall At a 10 percent fall the loss is 10, the whole deposit, and a further fall is a loss beyond it.
Takeaway. Losses are counted on the whole contract, so a modest fall can use up the whole deposit.
Expert viewMargin in more detail
Initial margin is the deposit to open a position; maintenance margin is the minimum to keep it open. Rules vary by contract and by broker, and may be raised when markets become unsettled, so a position can be asked for more money precisely when moves are large. Leverage is the ratio of contract value to deposit. Losses are measured on the full contract value, not the deposit, which is why a 10 percent move against a tenfold-leveraged position can equal the entire deposit.
Why derivatives exist
The same contract can be used by someone who has no grain at all and simply bets on the direction of the price. That is speculation. It adds liquidity to the market, but it carries the full risk of the contract with no offsetting business to cushion it.
Hedging
- Reduces a risk the person already has
- A farmer, a baker, a company with costs
Speculation
- Takes on a new risk on purpose
- Nothing offsets a loss
Expert viewRisk transfer is not risk removal
A hedge trades one risk for another. The farmer gives up the chance of a higher price, and the hedge can lose money on paper even while the farm sells at a good price. Basis risk (the hedge not tracking the exposure exactly) and the cost of margin calls on the hedging side are real trade-offs. Derivatives markets exist because of this transfer: they let those who want to reduce a risk deal with those who accept it, usually for a price, and the sums accepted by one side are the exposures shed by the other.
A worked comparison (illustrative)
Suppose a share is priced at 100 and then falls to 90. Here is what each position holds, ignoring costs.
| Position | Amount put up | Loss after the fall to 90 |
|---|---|---|
| Own one share | 100 | 10 (a tenth of the amount put up) |
| Futures-style position on one unit, deposit of 10 | 10 | 10 (the entire deposit) |
| Option bought, call, premium 5 | 5 | 5 (the entire premium) |
The same fall in the underlying uses up a very different share of the money put up. A fall to 80 would take the futures-style loss to 20, which is twice the deposit. The option buyer's loss would still be 5.
Costs and complexity
- FeesBrokerage, exchange and data fees add up
- ExpiryFutures and options end, so positions must be closed or rolled
- ComplexityContract size, settlement and margin rules differ per contract
- Time decayAn option buyer's premium shrinks as expiry nears
Derivatives are always riskier than shares
Used for hedging they can reduce risk; used with high leverage they can add a lot
Leverage just means bigger gains
It enlarges losses by the same factor, and they can exceed the deposit
Who should not use leverage without understanding it
This is a plain risk statement, not a recommendation. Leverage can produce losses larger than the money first put up. Anyone who cannot afford a loss of the whole deposit, who does not understand how margin calls work, or who has not read the contract specifications, faces a risk of losses they did not expect. Read the official risk warnings published in your own country before using leverage.
A share is ownership, a future is a duty, an option is a right for one side and a duty for the other.
Frequently asked questions
Is an option the same as a future?
No. A futures contract binds both sides; an option binds only the seller.
Can a share lose more than I paid?
Held outright, a share can fall to zero, so the loss is limited to the amount paid. Selling a share short is different and can lose more.
Why does a futures position have a deposit?
It is a good-faith amount held against losses; it is not the price of the contract.
Are these numbers real?
No. They are illustrative round figures.