Basics About Future & Options Trading
Two sophisticated financial instruments, futures and options can help investors leverage their portfolios, as well as hedge their risk.
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What Are Options?
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Traded like a stock, an option is a contract between a buyer and seller giving the buyer the right, but not the obligation, to purchase an underlying asset at a set price and within a set time.
What Types of Options Exist
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Coming in two types, called "calls" or "puts," options can be used in a variety of ways. A call option is an option to purchase an index or a stock, while a put option is an option to sell an index or a stock.
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Option Strategy
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Buying call options profit if the underlying instrument rises while put options profit when the underlying instruments falls.
What are Futures?
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In obligating the buyer to receive or deliver a financial instrument or commodity on a set date at a set price, futures trading differs markedly from options.
Strict Specifications
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Specifying a set underlying instrument, its size, delivery or contract cycle, maturity date, grade or quality specification, and delivery location and settlement procedure, futures are considerably more complicated than options.
Futures vs. Options
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Whereas the buyer of an option has the right to buy or sell the option's underlying security, a future's buyer has the obligation to take delivery of the underlying asset, which is a huge distinction.
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