Futures and options

Futures and options (F&O) represent financial products that investors can make use of for making returns or to act as a hedge against any current investments they possess. Both a future and an option allows any investor to purchase any investment at a particular price by a particular time and date. However, the markets for both these products are quite distinctive in the way they work and their risk for investors.

Futures are derivative contracts that compel parties to buy/sell an asset at a predetermined future date and price. In this the buyer must buy or the seller must sell at the fixed price regardless of the market rate on the said date. This allows an investor to speculate on the price or commodity or other security. It prevents losses from unfavourable price changes. Traders and investors use the term ‘futures’ on various assets such as crude oil, gold, natural gas, currency, underlying assets, bonds and securities.

The buyer of a futures contract can sell their position any time before. Futures contracts may only require a deposit of a fraction of the contract amount with a buyer. As futures use leverage, investors risk losing more than the initial amount. The broker’s amount may vary depending on the size of the futures contract, credit worthiness of the investor, broker’s terms and conditions.

In other words, a futures contract is representative of an obligation to purchase or sell any asset at a future (later) date at a pre-agreed-upon price. Futures act as a veritable hedge as far as your investments go, and are understood well when you consider commodities such as oil or wheat. For example, a farmer may wish to lock on an acceptable value (price) initially, just in case prices in the markets dip before any crop can be delivered. The buyer might also wish to fix an upfront price in case there is a hint of prices soaring by the time of crop delivery.

Options is a financial instrument based on the value of underlying securities. This offers the buyer an opportunity to buy or sell the asset depending on the type of contract they hold. The stated price of an option is known as strike price. ‘Call options’ and ‘Put options’ are the basis for a wide range of option strategies and sepeculations. An option’s daily trading volume and open interest are two crucial numbers to watch out for.

In other words, Options are a form of investment that deal with derivatives. They could be offers to purchase or sell stock, but they do not really represent the actual ownership of the underlying investments, at least, not until the agreement is final. Typically, buyers pay a premium for contracts in options, and these reflect a hundred shares of whatever the underlying asset is. Premiums are indicative of the asset’s “strike price” which is essentially the rate to purchase or sell until the contract expires. This is the date that indicates when the contract has to be used.

American options are free to exercised any time before the expiration date, unlike the European option which can be exercised on the expiration date or the exercise date.