Concept and types of futures
Futures are derivatives contracts a contract for the supply of the asset (commodity) in the future on agreed terms. As assets futures can act as a physical commodity (pork, gold, oil, grain, etc.), and specific financial instruments (bonds, stocks). Can be identified separately and currency futures purchase and sale of foreign currency.
Futures contracts are divided into contracts for the purchase and sale. In most cases, the purpose of buying futures - speculative, i.e. the buyer does not plan in the future to buy the product. He seeks to make a profit on the difference between the prices of buying and selling a futures contract.
Futures contracts have standardized terms, date of expiry and the quantity and quality of goods supplied. For example, 1 oil contract involves the supply of 1 thousand barrels. oil with predetermined characteristics (e.g., Urals). At the expiration of the term of the contract (futures), a delivery of goods. But the share of the futures that exist before the date of delivery is less than 3%
The other purpose of buying futures and hedging risks.
The concept and types of options
Option - a derivative financial instrument is a contract whereby the buyer or seller of an asset (securities, commodity) gets the right to purchase or sell the asset at a predetermined price during a fixed contract time. In this case, the option seller is obliged to make a return sale/purchase of the asset in the future under the terms of the option.
There are three main types of options - to buy (call option), to sell (put option) and bilateral (double option). Accordingly, the purchase option entitles the holder to buy the underlying asset at a fixed price, a put option to sell the asset.
Binary options can be traded on the exchange and on the OTC market. The first is the standard exchange contracts, they are treated like futures. They have their own specification, bidders specify only the size of the premium, the remaining parameters are established by the exchange.
OTC options are not standardized — they are on terms which are negotiated by parties to the transaction. Participants in the OTC market are large non-financial institutions. The objectives of the purchase options are speculative (profiting) or hedging (risk minimization).
How do the options? In a simplified form - the buyer gets the option to buy 1 thousand dollars. over 20 thousand. In this case, the buyer expects that the price of the dollar will be much higher and he can make quite a bargain at the end of the term of the option. If the end of the term of the option is $ 1,000. will cost 30 thousand rubles, the difference (10 thousand rubles) and become a profit for the buyer (excluding the cost of the prize).
Differences from futures options
It is important to understand the difference between futures and options. The fundamental difference between these two instruments is that the buyer (or seller) of the futures agrees to pay and obtain a particular commodity at an agreed price. The owner of the option also can do it, but is not required. But if the owner of the option you wish to use it, the seller is obliged to execute the delivery.
Distinctive feature of futures is the possibility of free exit from the market of the seller and the buyer.
It gets right to the buyer of the option is not free, it pays a premium (the price for the transaction in the future). When purchasing a futures contract, the buyer bears the risk of a negative price dynamics of the contract, and the potential size of losses is unlimited. But if the price of the option showed a negative trend, the risk of the buyer is limited only by the size of the award.
Options assume a more complex calculation of risks and the price of the put option requires special techniques of computation. Therefore, this tool is used only for professional investors and traders.