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Futures OptionsFutures Options
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Futures options work similarly to stock options, only the "thing" the investor is buying or selling has not yet been produced by the seller. Don't worry: investing in futures options doesn't mean you'll have a thousand bushels of grain delivered to your office at the end of the trade. Futures options are financial instruments that investors use to hedge risk or to speculate. By design, the futures market is risky, complex, and liquid (meaning there are many bid and ask offers and changes in supply and demand have smaller impacts on price). A futures contract is simply an agreement between someone agreeing to deliver the commodity and someone agreeing to receive it. Everything is specified, including the commodity (quality and quantity), the price per unit, as well as the method and date of delivery. A futures contract's price is represented by a price agreed upon for the commodity to be delivered, say one thousand bushels of grain at $5 per bushel. Profits and losses on futures options depend on daily market movements for that particular contract and are figured on a daily basis. So, should the futures contract for grain drop to $4 per bushel one day after the supplier and purchaser enter the contract at $5 per bushel, the supplier makes $1 per bushel, since the buyer has agreed to pay $5 per bushel. So on that day, the supplier's account is credited with $1,000 ($1 per bushel times 1,000 bushels), and the purchaser's account is debited by $1,000. Gains and losses are credited or deducted from an individual's account each day. Capital gains or losses aren't actualized until the investor sells the commodity. |
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Futures Options
