A futures contract is an obligation to buy or sell an underlying asset at some time in the future, at a pre-determined price. Futures contract are traded on regulated and organized futures exchange and the exchange act as a clearing house to every trade.
The futures contract detail the quality and quantity of the underlying asset. Futures contract is an obligation and in most cases the obligation is fulfilled by simply making an offsetting trade that takes you out of your original open position. Some futures contracts may call for physical delivery of the asset. The risk to a future holder is unlimited, and because pay off pattern is symmetrical, the future seller risk is also unlimited.
Futures contracts are settled daily and the final value price of all position are “marked to the market” each day after the official market close. So an account is either debited or credited by the futures exchange based on the change in the settlement price from day to day. The use of futures exchange gives confidence to both parties (buyer and seller) that their trade will be executed, no need to worry about the credit worthiness of the other party.
In futures trading the word margin refers to the amount of money you need to have in your account for a trade. The margin levels are set by the exchanges based on volatility and can be changed at any time. You are free to have more than that the margin requirement in your account. But once a position is established you are required to keep a “maintenance margin”.
Options are financial contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset (e.g. shares, bonds, commodities, currencies) at a specific price on or before a given date.
There are two basic types of options. A call options gives the option holder the right to buy, while a put option gives the option holder the right to sell. Call options are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires. Put options are similar to having a short on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.
There are four types of participants in options markets depending on the position they take: Buyers of call options, sellers of call options, buyers of put options and sellers of put options.
Option Terminology - The total cost (the price) of the option contract itself
Strike Price – The price at which the underlying stock can be purchased or sold
At-the-Money –the option’s strike price is the same as the underlying price.
Out-of-the-Money –the option’s strike price is higher (for calls) or lower (for puts) than the underlying price.
In-the-Money – the strike price is lower (for calls) or higher (for puts) than the underlying price.
Why Trade an option – options are used to help protect underlying positions against price fluctuations. This is known as hedging. the main reason for using options to hedge position is that by using options, you would be able to restrict your downside while enjoying the full upside in a cost-effective way.
Trading Opportunities and speculating: wide variety of strategies can be created using options from conservative positions to risky ones.
