Futures vs Options: Margin, Decay And Payoff Rules
A futures contract is an obligation to buy or sell at a fixed price, with a straight line payoff and daily mark to market. An option is a right, not an obligation, with a bent payoff, a premium that decays, and losses capped at the premium if you are the buyer.
That difference drives everything else: how much margin you post, how much a wrong view costs you, and whether time is on your side. Both are traded on the NSE under SEBI regulation, and both are settled through NSE Clearing.
The Comparison Table
| Feature | Futures | Options |
|---|---|---|
| Nature of contract | Obligation for both sides | Right for the buyer, obligation for the seller |
| Upfront cost | SPAN plus exposure margin, no premium | Buyer pays premium, seller posts margin |
| Leverage | High and fixed by the margin percentage | Very high for buyers, similar to futures for sellers |
| Time decay | None, only the cost of carry in the basis | Real. Theta erodes premium every day |
| Payoff shape | Linear, one to one with the underlying | Non linear, bent at the strike |
| Max loss | Very large in either direction | Premium for buyers, very large for sellers |
| Daily mark to market | Yes, cash settled every day | No MTM cash call for buyers, margins move for sellers |
| Transaction cost | Lower STT on sale, tighter spreads | Higher STT on premium, wider spreads on far strikes |
| Best used for | Directional exposure and hedging | Defined risk views, volatility views, hedging tails |
The Same View, Two Instruments
Assume Nifty 50 at 24,000 with an illustrative lot size of 75. A bullish trader has two routes.
Buying one Nifty future
Notional exposure is 24,000 times 75, which is Rs 18 lakh. Margin is SPAN plus exposure, often around 10 to 12 percent of notional for an index future, so roughly Rs 1.8 to Rs 2.2 lakh. Those percentages come from exchange risk models and change, so use your broker’s calculator.
If Nifty rises 200 points you gain Rs 15,000. If it falls 200 points you lose Rs 15,000, debited the same evening through mark to market. A 600 point fall costs Rs 45,000, and short margin means a call to add funds or a square off.
Buying one 24,200 call
At a premium of Rs 120, outlay is Rs 9,000, and that is the entire risk. No margin call arrives, no daily debit happens, and a 1,000 point collapse still costs only Rs 9,000.
The cost is decay and the strike. If Nifty rises 200 points to 24,200 over three weeks, the call may be worth less than Rs 120 because time value drained away, while futures would have paid Rs 15,000. Options cap your loss and charge rent for it.
Indian Specifics You Have To Know
- SPAN and exposure margin: SPAN is computed by the exchange risk system for worst case portfolio moves, and exposure margin is an extra buffer on top. Both apply to futures and to short options.
- Mark to market on futures: futures profit and loss settles in cash every trading day, so a losing position drains your account continuously. Option buyers face no such drain.
- Physical settlement: all single stock futures and options are settled by delivery of shares if held to expiry, with delivery margins rising in stages during expiry week. Index contracts are cash settled.
- STT: charged on the sell side of futures as a percentage of traded value, on the sell side of options as a percentage of premium, and at a much higher rate on the settlement value of options exercised in the money. Rates have been revised, so check the current schedule.
- Tick size: Rs 0.05. Index futures and near the money options quote tightly, while far strikes and stock options are wider.
Which one fits which job
- Hedging a delivery portfolio for a few weeks: futures are simpler and cheaper, at the cost of upside.
- Protecting against a crash while keeping upside: a long put, because the payoff bends.
- Expressing a view with a hard loss limit: buy options and accept decay.
- Trading volatility rather than direction: only options can do this.
Frequently Asked Questions
Which is cheaper to trade, futures or options?
Futures usually cost less in spread and tax per rupee of exposure. Options need less capital for a buyer, but the premium is itself a cost that futures do not have.
Can I lose more than my capital in futures?
Yes, in principle. A large gap against a leveraged futures position can create a debit larger than your balance, which is why mark to market and margin calls exist. Option buyers cannot lose more than the premium paid.
Do options always beat futures on a big move?
No. A deep out of the money option can expire worthless even after a move in the right direction, if the move is too small or too slow. Futures capture every point of the move, both ways.
Why do brokers block more margin near expiry on stock derivatives?
Because physical settlement is coming. Exchanges raise delivery margin in stages for positions likely to go to delivery, so open stock futures or in the money stock options require far more funds in the final sessions.
Key Takeaways
- Futures are an obligation with a linear payoff and daily cash mark to market.
- Options give the buyer a right, a bent payoff and a loss capped at the premium.
- Both futures and short options need SPAN plus exposure margin, set by exchange risk models.
- Time decay is an options only cost, and it is the price of limited risk.
- Indian single stock derivatives settle physically, so expiry week margins and delivery rules matter.
