An option gives you the right to buy or sell the underlying asset but not any obligation.
A call option gives you right to buy the underlying asset while a put option gives you the right to sell.
An option contract specifies the strike price, that is, the price at which you can buy or sell the underlying and the expiry date after which the option is no longer valid. In other words, the expiry is the last day on which a contract expires or ends. In Inidan markets, expiry is the last Thursday of every month. Options are also classified into American, which can be exercised at any time prior to the expiry date and European which can only be exercised at the expiry date.
A futures contract is a standardised, tradable contract, which requires the delivery of the underlying asset (commodity, stock etc.) at a specified price and specified future date.
Unlike options, buying a futures contract gives you the obligation to buy the underlying and thus involves greater risk. Another difference is that commodities like gold, cotton, crude oil etc are especially prominent in futures markets.
Futures transactions can be settled in three ways: squaring off, delivery and cash settlement.
Squaring off means taking a position opposite your initial one. For example, you square off the purchase of a gold futures contract by selling the identical contract.
Delivery means physically delivering the underlying asset on the agreed date. If you sell a gold futures contract of say 1 kilogram then you will have to give real gold to the buyer on the mutually agreed date.
Cash settlement involves paying the difference between the futures price and the spot price of the underlying asset.
For example, if you sell a gold futures contract worth one kilogram for say Rs 1.2 lakh and the price of the contract on expiry day is Rs 1.3 lakh then you will have to pay the buyer the difference of Rs 10,000.
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