What's the difference between futures and options?

Factual Questions
1

I guess I got the entire question in the thread title.

2

More than you’d ever want to know about futures here.
The short answer is that a futures contract is an obligation to buy or sell the agreed upon item at the agreed upon time at the agreed upon price. An option is just that, you have the option to buy or sell the agreed upon item at the agreed upon time at the agreed upon price.

Here’s a bad example. You might pay me $5 for the option of buying my car in a month for $5000. If in a month, my car is worth $4000, you won’t exercise your option. If it’s worth over $5000, you exercise your option, resell the car and pocket the difference. With options, your risk is limited to the actual price of the option, not the underlying value of the item. If we had agreed on a futures contract, you’d have bought my car no matter what is was worth.

3

An option gives you the right (but not the obligation) to purchase a certain product during a certain time interval at a certain price. The Strike price is fixed when you purchase the option. For example, you may buy an option to purchase 100 shares of Mircosoft at $25 per share between now and July. If Microsoft is selling for $22 per share in July, you need not exercise your option. Options are not free and the seller takes a guaranteed amount for assuming the down-side risk and selling you all the up-side risk.

A future is a contract to purchase/sell at a preset price in the future. For example, you can buy October corn and establish the price today for delivery in October. Both parties are obligated in a future. Farmers usually sell comodities in the future. If they know they’re going to get $82/ton for wheat next fall, they know how much to plant today.

4

The above posters got it right.

If you want something nice and mindbending about options, check out real options. It’s where management strategy and finance meet.

Here’s a decent paper on them:

http://mba.tuck.dartmouth.edu/paradigm/spring2000/articles/walters-decision_making.html

5

Actually the Strike price is fixed before it’s even listed. I’m not sure what you mean by the seller of an option taking a “guaranteed amount.” If that were only true…