Future contracts or simply futures are derivative instruments which obligate the involved parties to buy or sell an underlying asset at a predetermined price and date. Future is an obligation which means that both the buyer and seller will have to buy and sell the asset at the set price, irrespective of the current valuation on the expiry date.
These underlying assets can be stocks, commodities and even indices. Future contracts are standardized contracts and are therefore traded on the exchanges. They are widely used for trade speculation and hedging purposes.
Future contracts have a fixed expiry date and set prices which are known up front. These contracts are usually identified on the basis of expiry. For example, a December Crude Futures will expire in December. The futures market is very wide and there are various different types of futures available like commodity futures, stock index futures or currency futures.
Options
Options or option contracts give the investor the right but not the obligation to sell or buy a stock or any other underlying asset at a pre-determined price or date. Options can be classified int o two types namely call option and put option.
Types of Options
Options can be classified into two types, namely Call option and Put option. Let us discuss about them in detail.
1. Call Option: A call option is a contract which gives the call owner the right to buy or sell any security or underlying asset at a specified price within the predetermined time frame. It must be noted that it is only a right and not an obligation.
To buy a call option you need to pay the option premium. As we have discussed, it depends on the option owner that he wants to exercise the option or not. However, the seller is obliged to sell the underlying asset to the buyer. In case of a call option there are limited losses in form of options premium, but the profits can be limit less.
Call Options can be further classified in the following two types:
a) In the money call option – In this case, the strike price will be lower than the current market price of the underlying asset.
b) Out of the money call option – In this case the strike price will be more than the current market priced of the underlying asset.
2. Put Option: A put option is just the opposite of a call option as it gives the owner the right but not the obligation to sell a specified amount of underlying security at a pre-determined price within a specified time frame. This pre-determined price which the buyer of the put option can sell at is known as the strike price.
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