Futures option trading

Jun 24, 2020

  Futures option trading

  A forward contract is a customized contract between two parties to buy and sell a specific quantity of a specific commodity at a specific price on a specific future date.

  Futures are forward contracts traded on an exchange.

  That is, futures contracts are entered into on an organized exchange, such as a stock or Commodity Exchange.

  Futures contracts are standardized.

  More specifically, exchange-traded futures have exchange-standardized terms.

  The standardised terms of a futures contract include: quantity of the underlying product;

  The quality of the underlying product (no financial futures required);

  Delivery date and month;

  Quotation units (not the price itself) and the minimum change price (size of stock);

  And the place of settlement.

  In futures trading, when a trade is confirmed by two members of the exchange, the exchange itself becomes the counterparty to each trade.

  Futures contracts are more liquid and their prices more transparent, thanks to standardised trading volumes and market reports.

  Futures contracts can be exchanged with any member of an exchange.

  If the price of a futures contract is higher than the spot price, it is called a contango market.

  If the futures price is generally lower than the spot price, this is called backwardation.

  Call options are usually bought when prices are expected to rise.

  Put options are bought in anticipation of a fall in price or to protect investment profits.

  Like futures, options allow individuals and companies to hedge against large price movements;

  They also allowed speculators to gamble with limited liability and make huge profits.

  Futures contracts do not require an upfront payment, while option contracts require immediate payment, known as a premium.