Futures and Options Trading

What are futures and options?

Futures are contracts. These contracts are legally binding agreements, made on the trading floor, to buy or sell something in the future. That "something" could be livestock, a foreign currency, or some other item for trade. Each contract specifies the quantity of the item and the time of delivery or payment. The buyer and the seller of a futures contract agree on a price today for a product to be delivered and paid for in the future. That is why it is called a "futures" contract.

At most exchanges you can also trade options on futures contracts. Options are also contracts, one's which give you the right - but not the obligation - to buy or sell a futures contract at a particular price.

For instance, if you didn't want to commit yourself to buying a futures contract, you could buy an option on the futures contract. You would then have the right to exercise the option and buy the futures contract at a specific price if it seemed profitable.

On the other hand you wouldn't have to exercise the option if it were unprofitable. All you would lose is the premium plus commission and fees. You could also sell your option to someone else if it were more valuable than when you bought it. Options are ideal for investors who are clever, cautious or indecisive.