Futures vs Options: What Is the Difference?

A futures contract binds both the buyer and the seller to perform at a price fixed when the trade is done. An option hands its buyer a right to buy or sell at a stated price for a set period, leaving the matching obligation with the person who wrote it. The CFTC's glossary defines both instruments in those terms, and the rest of this post works through what the difference changes: cost at entry, maximum loss, exercise, expiry and tax class.

Options whose underlying is a futures contract have their own body of CFTC rules, Part 33, which covers exactly those options and not ones traded on a foreign board of trade. Before a firm opens a commodity option account, 17 CFR 33.7 requires it to give the customer a separate options disclosure statement and to take back a signed, dated acknowledgment of it.

What is the difference between a futures contract and an option?

A futures contract obliges each party to fulfil the contract at the price set when the contract was initiated, and it can be closed out either by delivery or by offsetting the position. An option gives the buyer a right with no obligation attached, to buy or sell a set quantity at a set price within a set period, whatever the market price happens to be at the time.

The glossary's Option Writer entry describes the other side: the writer originates the contract, takes on the obligation and receives the premium for it, and goes by option grantor or option seller too. A call is the right to buy, or to go long the underlying future; a put is the right to sell, or to go short it. The strike, which the glossary also calls the exercise price, is the price written into the contract at which the underlying changes hands.

An American option can be exercised any time up to expiry; a European option only on the expiration date, which the glossary defines as the last day exercise is possible.

What do you pay to open a futures position versus an option?

Margin opens a futures position; a premium buys an option. A margin deposit, the glossary says, buys no part of the position: it is cash or collateral, also called a performance bond, that passes from customer to broker, from broker to clearing member, and from clearing member to the clearing organisation. The premium, by contrast, is a payment the option buyer makes to the writer for granting the contract, and Part 33 calls the whole of what the buyer lays out, direct and indirect, the purchase price.

On the futures side there are two margin numbers. Initial margin is what the broker requires when the position opens. Maintenance margin has to stay on deposit for as long as the position is held, and if account equity falls to or below it the broker is obliged to call for a top-up back to the initial level. Exchanges specify both figures per contract, and the glossary adds that a futures commission merchant may require its customers to post more than the exchange level.

Options on futures are margined one of two ways, and 17 CFR 33.7 requires the firm to give the customer an explanation of the option margining system. The disclosure statement tells purchaser and grantor alike that they should know which of the two their option is subject to. Under stock-style margining the buyer pays the full premium at the outset and has no further financial obligation. Under futures-style margining the buyer posts initial margin instead and the position is marked to market daily, with gains and losses settled as they accrue. Across the option's whole life, the regulation says, the variation margin owed stays within the original premium, though a single payment or risk margin figure can run past it on the way.

How much can you lose on each one?

An option buyer's exposure stops at the purchase price. 17 CFR 33.7 says so for both margining systems: the risk is the premium and the transaction costs on it. A futures position carries no such stop. The risk disclosure statement the CFTC prescribes for futures in 17 CFR 1.55 states that a customer may lose the whole of what was deposited to establish or maintain the position and incur losses beyond that, may be called for substantial additional margin at short notice, and, if the funds do not arrive in time, may have the position liquidated at a loss and owe whatever deficit remains.

Writing options is a third risk profile. Nobody should grant an option, 33.7 warns, unless they can meet further margin calls when the market moves against them and absorb a very large loss. Its list of option trading risks is more specific: an uncovered call writer is out of pocket once the future finishes above the strike by more than the premium taken in, and an uncovered put writer once it finishes below the strike by the same margin. A writer who also holds the underlying future on the other side of the trade carries that futures position's full risk less the premium, and gives up every bit of gain past the strike.

The statement carrying all this is prescribed word for word in the regulation, and its first sentence says that "the purchase and granting of commodity options involve a high degree of risk". Our post on whether you can lose more than you invest works through the futures half of this in a real account.

Why can an option lose money while the market moves your way?

Because the option's price need not move by as much as the underlying does, and because the premium has to be earned back first. Delta, in the glossary, is how far an option's price is expected to move when the underlying moves by a single unit, and the entry's own example gives an option at a delta of 0.5 a $0.50 move for $1.00 on the underlying.

The premium is the other half, and 33.7 makes working it out a disclosure requirement: the customer is told to calculate carefully what price the underlying future has to reach before the option position makes money. Under stock-style margining that price is the strike plus the premium and the other costs of getting in and of exercising or closing out, and for a put the strike minus the same sum. Under futures-style margining the position becomes profitable once variation margin collected runs past what entering it cost. A futures position has no premium to recover at all.

The vocabulary around the gap between strike and market price is also in the glossary. Intrinsic value measures what an option is worth on immediate exercise: how far the underlying sits above a call's strike or below a put's. An option with a positive value if exercised is in the money, and the entry's example is a call struck at $1,100 on gold trading at $1,150, in the money by 50 dollars. An option with no intrinsic value is out of the money; a strike sitting on the underlying's current trading price is at the money.

What happens when an option on a futures contract is exercised?

You end up holding the underlying futures position. 17 CFR 33.4 allows options on futures to be exercised one way only: by book entry at the clearing organisation, establishing a position in the underlying futures contract. 33.7's disclosure statement puts that to both sides before they start.

From there the mechanics are the clearing house's. Assignment, in the glossary, is the clearing organisation designating the writer who has to buy on an exercised put or sell on an exercised call, and the entry singles out early exercise in particular. Automatic exercise is a provision in the contract itself: at expiry an option in the money by some stated depth is exercised for you, absent instructions to the contrary. The exchange's rules have to require that the grantor is notified of each exercise, and under 33.7 a firm has to give its customers the procedure for exercising, the expiration date, and how late on that date an option can still be exercised. That last time can vary, which is why the rule tells participants to ask their own firm what deadline it accepts exercise instructions by.

Expiry timing is where options on futures stop looking like the future they track. 33.4 requires exchange rules to set option expiry at least one business day ahead of whichever comes first — a first notice day or a last trading day on that commodity or a related one. The exception is a cash-settled underlying future, where the option may expire at the same moment as the future.

Can you always close an option position before expiry?

No. The CFTC says so in the disclosure statement itself: 33.7 states there is no guarantee that an option position can be offset on the exchange by a closing purchase or sale. Where it cannot, a writer holds the full risk of the position until it expires, and a buyer sitting on a profit may have to exercise the option to collect it.

Price limits sharpen the problem. The option may carry no daily price fluctuation limit while the underlying future does, so the usual pricing relationship between the two can come apart while the future sits limit-locked. A futures position created by exercising the option may not be offsettable at all for as long as the limit holds. Our post on limit up and limit down covers how those limits work on equity index futures. A firm also has to describe, where it applies, what a limit move in the future does to the option's value, and to disclose any policy or exchange rule bearing on a customer's ability to perform or to close out, with trading suspension given as the example.

A futures contract has a simpler exit by construction: the glossary's definition has it satisfied by delivery or by offset, and its Offset entry is the liquidation of a position by an equal and opposite trade in the same delivery month. What sits behind that simpler exit is the open-ended exposure in 1.55.

Are futures and options taxed the same way in the US?

Both can land in the same tax class, by two different doors. Section 1256 of the Internal Revenue Code lists five kinds of contract in the class. A regulated futures contract is the first of them. A nonequity option is the third, defined as any listed option falling outside the equity-option definition. Listed, for this purpose, means trading on a qualified board or exchange or under its rules; an equity option means one on stock, or one valued by reference to a stock or to a narrow-based security index.

The statute stops at the definitions and does not work through where any particular option lands. IRS Publication 550 does: commodity futures options are nonequity options in its listing, as are debt options, options on currencies, and options on a broad-based stock index. The statute also reaches the end of a position by any route — offset, delivery taken or made, exercise, assignment or lapse. And it carves securities futures contracts and options on them out of the class altogether, unless what is held qualifies as a dealer securities futures contract: one a dealer enters into, or grants, in the normal course of dealing in them, traded on a qualified board or exchange.

What section 1256 treatment does to a gain — the 60/40 split and the year-end mark to market — is the subject of how futures are taxed, and it applies to the class rather than to futures alone. The statutory definitions here are from the 2023 edition of the US Code and the Publication 550 list from the 2025 edition of that publication; none of it is tax advice.

What does this mean on a funded futures account?

Funded accounts here are futures accounts. The instruments you can trade are futures listed on CME, CBOT, COMEX and NYMEX, and the instrument table behind that article lists them contract by contract with the contract unit, tick size and tick value for each. So the sizing question on one of these simulated accounts is denominated in contracts and ticks, which is the arithmetic in futures position sizing.

The margin machinery in the first half of this post also works differently on a simulated funded account. No broker calls for additional funds and there is no deficit to make good: the account is simulated, trading live market data, and the real money is the payout on the profits. What was paid for the account is real money as well. What constrains the position instead is the published loss line in the drawdown rule, a distance you can measure in ticks before placing the trade.

Four cases, then: open-ended for a futures position in a live retail account, bounded by a published rule on a simulated funded one, bounded by the premium for an option buyer, and open-ended again for a writer holding no offsetting futures position.

Frequently asked questions

Are options on futures the same thing as stock options?

No, and they separate both in the tax code and at exercise. Section 1256 defines an equity option as one to buy or sell stock, or one valued by reference to a stock or a narrow-based security index, and a nonequity option as any listed option outside that equity definition; IRS Publication 550 puts commodity futures options in the second group. At exercise they produce different things: 17 CFR 33.4 has an option on a futures contract exercised only by book entry at the clearing organisation, establishing a position in that futures contract.

Can you lose more than the premium when you buy an option on a future?

Not as the buyer. 17 CFR 33.7 states that under both stock-style and futures-style margining, a purchaser cannot lose more than the premium paid plus the transaction costs on it. Writing options is a different matter: the same section warns that a grantor may be called for additional margin on adverse moves and should be able to absorb a very large loss.

Do options on futures expire at the same time as the futures contract?

Not unless the underlying future is cash-settled. 17 CFR 33.4 requires an exchange's rules to put option expiry a minimum of one business day ahead of whichever arrives sooner: a first notice day, or a last trading day, in that commodity or a related one. Where the underlying future is cash-settled, the rule permits the option to expire at the same time as the future — the only exception the rule provides.

Can you trade options on a funded futures account at Lumen Futures?

Not from the published instrument list, where every row is a futures contract. The help center article on instruments says you can trade futures listed on four exchanges — CME, CBOT, COMEX and NYMEX — and that what you cannot trade is anything not listed on those four. The contract-by-contract table linked from it carries the contract unit, tick size and tick value for each row.