Futures and options are stock “derivatives”. The value of a derivative is derived from the value of an underlying asset, which could be stocks or commodities. When two parties enter into a derivative contract, they are essentially agreeing to buy or sell an asset at a predetermined price and date.
Who issues Future And Options?
Options have one issuer, Options Clearing Corporation (OCC). The OCC issues options and guarantees contract performance. OCC issues options regardless of the underlying security issuer. Futures contracts are sold by commodity producers, but they don’t exist until they’re bought.
Features Of Future And Options
Features Of Future
How Do Future And Options Work?
Features Of Option
This is the rate at which the option owner can buy or sell if the contract is exercised. The strike price is fixed.
Intrinsic value is the strike price minus the current security price. Call options have intrinsic value.
Option exercise costs a ‘premium’ Unexercised holder loses premiums. After premiums, the investor gets the balance.
No Obligation To Buy Or Sell
By expiration, the investor can buy or sell the underlying asset. No buy-or-sell required. The option expires if the holder doesn't buy or sell.
Types Of Future And Option
Let’s look at different types of futures and options.
Benefits Of Future And Options
Investors can reap many benefits from this investment vehicle. Some of the benefits of future and options include the following: –
In financial markets, asset prices are unpredictable. Futures and options let buyers and sellers set a price to trade.
Futures and options prevent market imbalances. Prices of derivatives and underlying assets tend to be equal. This boosts market efficiency.
Futures and options have lower fees than stocks and bonds. This lowers their transaction costs.
Futures and Options are used to hedge risks because their value depends on the underlying asset. You can offset your losses if your contract value falls.
Comparison Of Future and Options
|MEANING||Agreement between two parties to buy or sell an asset at a set price and within a set time frame.||Futures contracts are agreements to buy or sell an asset at a specific price on a set future date.|
|OBLIGATION||Both parties are obliged to perform the contract.||Only the seller is obliged to perform the contract.|
|STOCK EXCHANGE||Are not traded on an exchange.||Are traded on an exchange.|
|MATURITY||Matures after the delivery of the underlying asset.||May not evolve when the underlying asset is delivered.|
|PREMIUM||No premium is paid.||The buyer pays the seller a premium.|