As we have seen, unlike a futures or forward contract, an option gives the buyer the right but not the obligation to exercise. Only the option seller has the obligation to perform. In the case of either a futures or a forward contract, both the buyer and the seller are obliged to perform.

What is more, the buyer of a futures or forward contract does not pay the seller to accept the obligation, whereas in the case of an option, the buyer pays the seller an option premium.

Because of this, the risk/reward characteristics of the two types of contract are very different.

With either a futures or a forward contract, a long position (i.e. buying a futures contract) realises a dollar-for-dollar gain when the price of the contract increases and a dollar-for-dollar loss when the price of the contract falls.

The opposite holds for a short position.

Options don’t provide this kind of symetric risk/reward relationship.

The most a long position can lose is the option premium, while retaining all the upside potential of the position (minus only the cost of the option).

The maximum profit a short position can realise is the option price (the premium), but the short position has substantial downside risk.