Some novice investors toss around the terms options and futures like they are interchangeable, when in fact, they are actually two very different things. Both involve the purchase or sale of a future commodity such as stocks or bonds, but the conditions of the sale are what set them apart. Options and futures are also both ways to hedge your investments, which means they reduce your financial risk if the market goes sour.
In the stock market, a futures contract is an agreement between two parties to buy or sell a set amount of stocks by a predetermined date. However, where this gets tricky, is that investors can also sell their futures contract. Investors are typically in the long position because they agree to buy the stocks. Businesses are in the short position because they agree to sell the stock according to the terms of the contract. However, investors can go short if they sell the futures contract. Typically investors pay an upfront 20% investment called a margin. During the term of the contract though, they never actually own the stocks; they just have the rights to purchase the stocks at a later date. For example, say you agree to buy 200 shares of Apple stock at $100 per share by June 1st. Your futures contract is worth $20,000 at the time you enter the agreement. If the stock goes up to $125, you can sell the contract early and make a considerable profit. If the value of the stock goes down, you will lose more than your initial investment. Futures are considered a high-risk investment. Once you enter into a futures contract you are obligated to buy or sell that stock upon expiration unless you sell the futures contract to someone else first.
The biggest difference between futures and options is that with an option contract you are not obligated to purchase the commodity when the contract comes to term. However, you do have to pay an upfront premium fee. If you choose not to purchase the stocks then you forfeit the premium fee. Returning to the Apple example, you can purchase an options contract to buy 200 shares of stock at $100 each for $2,000. If for some reason the stock plummets to $100 per share, you can forfeit your option and you only lose the premium fee of $2,000 instead paying $20,000 for stock that is only worth $10,000. Because investors are not obligated to fulfill options contracts as they were with futures contracts, options are considered a much lower-risk form of investment.
Any type of speculative investment comes with risk. Although options are safer than futures, both should be approached conservatively if you are a novice investor. Most investors that buy futures and options have years of experience with the stock market and top-notch financial advisors. However, if you are interested in trading stocks and futures than it is a good idea to speaking with a reputable financial advisor before making any investments.
About the Author: Natisha Antill is a finance student who is seriously considering entering the world of day trading when she has more time to focus on a plan. She enjoys reading Timothy Sykes reviews and studying the procedures used by today’s most successful traders.
Option trading can be defined as a form of investment that is now getting common. It is a fact that people do not have much understanding regarding this kind of investment. It is better to learn option trading because it does involve a huge range of possibilities and opportunities within it. The markets of this kind of investment are currently making huge profits. For this reason, a number of individual investors are focusing over investing in to this kind of investment plan. Many professional investors as well as institutional ones are also heading forward towards this investment scheme. Learning is very important in order to make the most of this plan. If it is well understood then it is expected that great returns and profits can be generated. This plan is usually in the form of a contract between the buyer and the purchaser. The purchaser will be given with the rights of selling and purchasing afterwards.
Options trading tips should be taken and followed in order to have a successful investment. It is required to get these tips as this kind of trading is not very simple. For this reason, every professional advices to take the tips before making any investment in this trading type. It is always recommended that risk capital should be utilized in this kind of investment so in case of loss you might not suffer much. It is also mentioned that the purchaser should thoroughly go through the contract that has been made with the seller. This is very essential for the future as well. A life time has been given to this kind of trading plans and the contract has to be exercised by the purchaser before this time period. After that life time, there is no worth of this contract. It is a bit complicated kind of contract and should be well understood.
The buyers of a put think about how to benefit from the falls of price of the underlying one or be protected from them. They have a downward vision of the market and usually hope that it should increase the volatile nature.
The long put option strategy is a basic strategy in optionstrading where the investor buy put options with the belief that the price of the underlying security will go significantly below the striking price before the expiration date. His risk, his potential of loss, is limited to the premium whereas his potential of benefit is unlimited to the expiration on a descending market.
The threshold of profitability in this operation, is the price of exercise – the price of the premium. On the other hand to emphasize that his delta increases up to-1 as they lower the prices of the underlying assets.
More BEAR are the expectations of the market, the put must buy to itself in the position OTM as deep as possible, that is to say that the lowest price of exercise must be for the buyer of the put. Compared to short selling the stock, it is more convenient to bet against a stock by purchasing put options as the investor does not have to borrow the stock to short. Additionally, the risk is capped to the premium paid for the put options, as opposed to unlimited risk when short selling the underlying stock outright.
Let’s put an example: A Spanish company has come to an agreement with an American company tolling that to pay the Spaniard in 3 months a quantity in dollars. The Spanish company believes that the dollar can re-point opposite to the current levels that the euro shows, for what it does not want to cover this risk (it would win less), so he buys a put to 1,28, which is the current change (1,28 dollars = to 1 euro).