What Are Derivatives? Options vs. Stocks vs. Futures
A derivative is a contract whose value is derived from something else -- a stock, an index, a currency or a commodity, called the underlying. Owning a share means owning part of a company. Holding a derivative means holding a contract about the price of that share or index. Options and futures are the two derivatives most investors meet first. This guide from OptionLab (option-graph.com) compares them with plain shares: what you own, what you owe, and how each one gains or loses.
Three Ways to Get Exposure to the Same Asset
Imagine three investors who all think a stock trading at $100 may rise. The first buys shares: she owns the asset itself, pays the full price, and gains or loses one dollar for every dollar the stock moves. The second takes a futures position: a contract to buy the asset at a set price on a set date. He pays no purchase price up front, but he must deposit collateral, and his gains and losses follow the asset almost one-for-one. The third buys a call option: she pays a premium for the right, not the obligation, to buy at a fixed strike.
The table below summarises the difference. The rows are the questions that matter before any trade, and they are the same questions the calculators on option-graph.com help you answer with numbers.
| Question | Shares | Futures | Option (buyer) |
|---|---|---|---|
| What do you hold? | Part of the company | An obligation to buy or sell at a set price | A right to buy (call) or sell (put) at the strike |
| What do you pay up front? | The full price | Collateral (margin), not the price | The premium |
| Most you can lose | The amount invested | Can exceed the collateral | The premium |
| Does it expire? | No | Yes, on a set date | Yes, on a set date |
Futures: An Obligation on Both Sides
A futures contract binds both parties: the buyer must buy and the seller must sell at the agreed price on the agreed date. Because neither side pays the contract's full value up front, the exchange requires margin -- collateral that absorbs daily losses. Futures are typically marked to market every day: the day's gain or loss is settled in cash, so a losing position may need more collateral before expiration. On the Tel Aviv Stock Exchange, for example, the contract on the TA-35 index is the index multiplied by NIS 50, settled daily in cash, according to the exchange's product specification.
The payoff of a long futures position is a straight line: it gains as the price rises and loses as it falls, with no floor. That linear shape is exactly what you see when you build a position from the underlying alone on option-graph.com.
Options: A Right for One Side, an Obligation for the Other
An option splits the contract unevenly. The buyer pays a premium and gets a right; the writer receives the premium and takes on the obligation. That asymmetry changes the shape of the result. The buyer's loss is capped at the premium; the writer's is not. Before expiration the option's price also depends on time and volatility, not only on the underlying.
The same split appears in every options strategy, from a single call to a multi-leg spread you might model on option-graph.com. If you are new to options, start with what a call and a put actually give you.
Read: What Is an Option? →A Worked Example: Shares vs. a Call
Take the stock at $100. One investor buys 100 shares for $10,000. Another buys one call with a $100 strike for $3.00 per share -- $300 for a contract covering 100 shares, the same inputs you would enter in the calculator on option-graph.com. At expiration:
- Stock at $110: the shares gain +$1,000. The call is worth $10 per share; after the $3 premium the result is +$700.
- Stock at $90: the shares lose −$1,000. The call expires worthless and the result is −$300, the premium.
- Stock at $103: the shares gain $300; the call is exactly at breakeven.
The call risked less money but gave up part of the upside: it needed the stock above $103 just to break even. A futures position on the same 100 units would have moved like the shares, gaining or losing $1,000, without paying $10,000 up front but with collateral at risk every day. Neither is better in general; they are different exposures. You can check each case yourself in the calculator on option-graph.com.
100 shares bought at $100
Profit zoneLoss zoneK = StrikeBE = Breakeven
| Point | US dollars for 100 shares |
|---|---|
| Breakeven 100 | 0 |
| P/L at 80 | −2,000 |
| P/L at 120 | +2,000 |
- 100 shares bought at $100
- No dividends, commissions or taxes
One call, $100 strike, $3 premium
Profit zoneLoss zoneK = StrikeBE = Breakeven
| Point | US dollars per contract (100 shares) |
|---|---|
| Strike 100 | −300 |
| Breakeven 103 | 0 |
| P/L at 80 | −300 |
| P/L at 120 | +1,700 |
- One contract = 100 shares
- Premium $3.00 per share
- Held to expiration; commissions and taxes excluded
What Derivatives Are Used For
- Hedging: reducing a risk you already have, such as a fall in a portfolio.
- Exposure: taking a position on a price without buying the asset itself.
- Pricing and arbitrage: keeping related prices in line across markets.
- Income: writing options in exchange for premium, with the risk that comes with the obligation.
Each use moves risk from one party to another; it does not remove it. Seeing the payoff of a position before trading, for example on option-graph.com, makes it easier to tell which side of that transfer you are on.
Risks and Limitations
Derivatives can magnify results. A futures position can lose more than the collateral posted, an option buyer can lose the entire premium, and an option writer can lose far more than the premium received. Expiration dates, margin calls, liquidity and fees all matter. Derivatives are not suitable for every investor, and nothing here is investment advice. OptionLab (option-graph.com) is an educational and analytical tool.
Summary
- A derivative is a contract whose value depends on an underlying asset.
- Shares are ownership; futures are an obligation on both sides; options are a right for the buyer and an obligation for the writer.
- Futures move almost one-for-one with the underlying and need margin; an option buyer's loss is capped at the premium.
- Compare positions by what you hold, what you pay, the most you can lose and when it ends; the payoff charts on option-graph.com show the most you can lose directly.
To see these shapes side by side with your own numbers, build them in the calculator on option-graph.com.
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