Futures Options Trading: What You Need To Know

2007-03-08 10:33:40

( Financial )



Futures options trading are integral parts of a commodity business. Futures and options are derivative investments; they do not represent ownership (as in the case of stocks) and they do not promise the repayment of a loan (as in the case of bonds). Futures and options are merely opportunities to transact under particular conditions.

What are Futures?

Futures are obligations to buy or sell a specific commodity, on a specific day and a specified price. You can buy futures for just about any commodity – this includes wheat, rice, corn, gold, silver, oil, sugar, just to name a few.

Futures trading helps individuals or businesses to minimize risk. Trading commodities involves a lot of uncertainty, especially since they are very much subject to fluctuations in supply and demand. For instance, an oil company with a futures contract to buy crude oil at a few dollars per barrel will be protected from a sudden increase in oil prices. As long as the futures contract is valid, the oil company can buy oil at the price specified in the contract, even if it is much lower than it is currently trading for.

What are Options?

Options are the right to buy or sell a specific item or commodity for a particular price during a particular period. As in futures, options can apply to just about any commodity.

Note that options are rights to buy or sell; while futures are obligations to buy or sell. There is a subtle difference here.

Businesses usually engage in futures options trading to minimize risk, but they can also be used to maximize gains as well. In futures options trading, you are basically betting on the movement of commodity prices. If you are a producer of a commodity, you want to sell your products at the highest prices possible. If you are a buyer of a commodity, on the other hand, you want to purchase products at the lowest possible prices. Futures and options trading can help you achieve these goals, provided that you are able to correctly forecast the price movements involved.


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