Futures And Options Trading
Most people invest their money in savings bond or the stock market. In fact, Futures and Options Trading are better way to invest your money and have fun at the same time. Most savings plans give you set interest rates overtime. Unless you have a lot of money invested, the interest really doesn’t make that much return for you. The meager interest on a money market account or a savings account will only give you a few cents and maybe dollars a month. Some of the investment plans will not even allow you to take the money out of the bank without losing the interest.
What is Futures Trading?
A futures contract is an agreement between two individuals or entities to deliver and to buy some important assets/commodities where the unit price, the payment, delivery date, and the quantity and quality of the asset/commodity ordered are clearly stated in the contract. Some of the important futures trading in the financial world are oil futures trading, gold futures trading and FOREX futures trading. The good thing of futures trading is that both parties are spared from uncertainty and market risk, futures saves them from the trouble of haggling just to get the needed commodity or the underlying asset.
The Hedgers
The buyer and the producer (called the hedgers) both have hedged their risk by having a futures contract: the buyer is secured that he will have his supplies after a certain period of time while the producer is sure that his assets will be disposed upon closure of the futures contracts. Domestic and international corporations, banks, insurance companies, mutual fund managers, and trading firms are the main hedgers in futures market.
In fact, futures contract is indeed a straight forward activity that involving a buyer and a seller. However, because of the present of the third party, namely speculators, more colors have been added in to the futures trading market.
The Speculators
These speculators have no direct participation in the delivery of the underlying asset or commodity, where their main purpose is try to make a profit by observing and calculating market moves and opening another contract called the “derivative contract”, offering another related product being traded. Speculators assume risk in anticipation of making a profit; in doing so, they add liquidity to the market.
As sellers always want the highest possible price while buyers want the lowest possible price, it is not easy to set a price that agreed by both hedgers. When speculators enter the marketplace, the number of ready buyers and sellers increases, and hedgers are no longer limited by the hedging needs of others.
What Is Options Trading?
Before we go any further on options trading, let’s understand what an option is. Option is defined by The Options Industry Council as “a contract to buy or sell a specific financial product officially known as the option’s underlying instrument or underlying interest.” What exactly is that means?
To put it into a layman term, option simply means you purchase the right to buy or to sell something at a specific price within a specific time frame. You are not buying or selling that product, you just buy “the right to buy” or “the right to sell” by paying a certain premium. It is vital for you to understand this fundamental so that you will not confuse in the coming study.