What are Futures and Options ...1

 Futures and Options...1

Options and futures are both financial products investors can use to make money or to hedge current investments. Both an option and a future allow an investor to buy an investment at a specific price by a specific date. But the markets for these two products are very different in how they work and how risky they are to the investor.

A futures contract allows you to buy or sell an underlying stock or index at a preset price for delivery on a future date. Options are of two types -- call and put. ... A call seller has the obligation to give delivery to the buyer at the preset price even if current market price is higher than former.

An options contract gives an investor the right, but not the obligation, to buy (or sell) shares at a specific price at any time, as long as the contract is in effect. By contrast, a futures contract requires a buyer to purchase shares—and a seller to sell them—on a specific future date, unless the holder's position is closed before the expiration date.

Options

Options are based on the value of an underlying security such as a stock. As noted above, an options contract gives an investor the opportunity, but not the obligation, to buy or sell the asset at a specific price while the contract is still in effect. Investors don't have to buy or sell the asset if they decide not to do so.

Options are a derivative form of investment. They may be offers to buy or to sell shares but don't represent actual ownership of the underlying investments until the agreement is finalized.

Buyers typically pay a premium for options contracts, which reflect 100 shares of the underlying asset. Premiums generally represent the asset's strike price—the rate to buy or sell it until the contract's expiration date. This date indicates the day by which the contract must be used.

(To be continued..)