A futures contract calls for delivery of an asset (or in some cases, its cash value) at a specified delivery or maturity date for an agreed-upon price, called the futures price, to be paid
at contract maturity. The long positionis held by the trader who commits to purchasing the asset on the delivery date. The trader who takes the short positioncommits to delivering the asset at contract maturity.
The trader holding the long position profits from price increases. Suppose that at expiration the S&P500 index is at 1450.50. Because each contract calls for delivery of $250 times the index, ignoring brokerage fees, the profit to the long position who entered the contract at a futures price of 1447.50 would equal $250 %?(1450.50 %?1447.50) %?$750. Conversely, the short position must deliver $250 times the value of the index for the previously agreed-upon futures price. The short position’s loss equals the long position’s profit.
The right to purchase the asset at an agreed-upon price, as opposed to the obligation, distinguishes call options from long positions in futures contracts. Afutures contract obliges the long position to purchase the asset at the futures price; the call option, in contrast, conveys the right to purchase the asset at the exercise price. The purchase will be made only if it yields a profit.
Clearly, a holder of a call has a better position than does the holder of a long position on a futures contract with a futures price equal to the option’s exercise price. This advantage, of course, comes only at a price. Call options must be purchased; futures contracts may be entered into without cost. The purchase price of an option is called the premium. It represents the compensation the holder of the call must pay for the ability to exercise the option only when it is profitable to do so. Similarly, the difference between a put option and a short futures position is the right, as opposed to the obligation, to sell an asset at an agreed-upon price.