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Futures and Options Markets

What are futures and options?

Futures are contracts. If you're a lawyer, athlete or bridge player, you know about contracts, but these are a little different.

These contracts are legally binding agreements, made on the trading floor, to buy or sell something in the future. That "something" could be livestock, a foreign currency, or some other item for trade. Each contract specifies the quantity of the item and the time of delivery or payment. The buyer and the seller of a futures contract agree on a price today for a product to be delivered and paid for in the future. That is why it is called a "futures" contract.

Now lets see if we can complicate things. At most exchanges you can also trade options on futures contracts. Options are also contracts, one's which give you the right - but not the obligation - to buy or sell a futures contract at a particular price.

For instance, if you didn't want to commit yourself to buying a futures contract, you could buy an option on the futures contract. You would then have the right to exercise the option and buy the futures contract at a specific price if it seemed profitable.

On the other hand you wouldn't have to exercise the option if it were unprofitable. All you would lose is the premium plus commission and fees. You could also sell your option to someone else if it were more valuable than when you bought it. Options are ideal for investors who are clever, cautious or indecisive.

1.What is the Purpose of the Futures markets?

The futures markets permit farmers, producers and owners of commodities (e.g., wheat, heating oil, sugar, gold, stocks, and bonds) to transfer the risk of growing and owning these commodities to futures speculators. Those who use the futures markets to transfer risk, such as farmers, are called hedgers. Speculators are those who assume the risk of a price change that hedgers seek to avoid. Speculators seek the opportunity to profit. When a speculator assumes price risk, this allows the hedger to concentrate on the more controllable aspects of his business, such as growing corn. Futures speculation is unlike most investments in that price movements are magnified by leverage, as a result of deposit requirements representing only 5-10% percent of the full contract value. Additional margin deposits may be required, depending on market fluctuations. Price changes adversely affecting the hedgers' physical position, such as the farmer's cornfield, can be offset by a comparable price change in the futures position.

To learn more about the Futures and Options Markets contact us here at 1-888-456-8090 or fill out our online info form and we will respond immediately.

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