Futures And Options

Comments · 24 Views

Futures trading is a contract between a buyer looking to invest and a seller and where the contract is made for the future and has an expiration date.

You're able to sell both options and futures contracts, which are derivatives markets. An options contract gives an investor the right, but not the obligation, to buy (or sell) shares at a specific price at any time, as long as the contract is in effect. By contrast, a futures contract requires a buyer to purchase shares—and a seller to sell them—on a specific future date unless the holder's position is closed before the expiration date.

Futures And Options: Options and futures contracts are two of the most well-known financial products for investors. Both an option and a future allow an investor to buy an investment at a specific price by a specific date, but the markets for these two products are very different in how they work and how risky they are to the investor.

Options

Options are contracts giving buyers the opportunity, but not the obligation, to buy or sell some underlying asset at an agreed-upon price. Options can be based on financial instruments such as stocks, mutual funds, or bonds. Investors don't have to exercise the option if they decide not to do so.

Options are a derivative form of investment. They may be offers to buy or to sell shares, but don't represent actual ownership of the underlying investments until the agreement is finalized. With options, investors can both capitalize on opportunities as well as limiting their risk exposures. 

Options contracts are options designed to provide buyers with the right to acquire (or sell) securities at a specific price. Options contracts are typically for sale in increments of 100 shares of the underlying asset. While the broker in this example does not reveal them, some options are more popular than others and have an option strike price that is different from the asset's spot price.

Types of Options: Call and Put Options

Options are wagers that shares of the underlying stock will be worth more or less by a specific date. The value of an option is its strike price plus or minus the intrinsic value. Call options can take two forms: The investor can exercise her option to buy the stock from the writer before the expiration date, or to sell it back to the writer before expiration for a profit (if it  has increased in price).

 

A call option gives an investor the right to buy a stock at a fixed strike price sometime within the next three months. If, for example, an investor opens a call option to buy XYZ at $50 with the stock currently trading at $49, and if XYZ jumps to $60 before the option expires, then our investor can exercise the right to buy the stock at $50 and sell it immediately for $60 for a quick profit of $10 per share.

Futures

Futures contracts are considered a true hedge investment and are most understandable when considering natural commodities such as corn or oil. For instance, a farmer may want to lock in an acceptable price upfront in case market prices fall before the crop can be delivered. The buyer also wants to lock in a price upfront, too, if prices soar by the time the crop is delivered.

Who Trades Futures?

Futures allow institutional buyers to establish a price for goods ahead of time. This protects both sides of the deal from big swings in commodity prices.

Futures are a type of contract between two parties to buy or sell an asset at a specified future time and price.  The asset can be a physical goods or financial instrument. Retail buyers use futures contracts to minimize risk through the use of leverage and to gain exposure to the underlying security.

To learn more about futures and options follow the link given

 

Comments