Options and Futures

Futures: 150 years ago, every harvest season the price of produce was so low that it couldn't be bought or even rotted on the street. But after the harvest season was over, the price of produce would skyrocket. So farmers made a contract with buyers during the planting season to trade produce at a future date. This ensured that the farmers could buy the produce and the buyers could buy it at a guaranteed price. This evolved into what is now known as futures.

To put it simply, a buyer and a seller agree to buy and sell something at a certain date in the future.

Options: are derivatives of futures. Futures are the buying and selling of goods in the future, while options are the right to buy goods.

For example, if A has 100 pounds of rice and the current market price is $200, B pays 5 percent of $200, or $10, for an option to buy the rice in 4 months. That means in 4 months, B has the right to choose to buy the 100 pounds of rice or not.

Of course if the rice is worth $300 in 4 months, B will choose to exercise his right to buy it. Then he can turn around and sell it for $300. But if the rice is only worth 100 dollars after 4 months, of course B will not buy the rice for 200 dollars. Of course by giving up the right, he also gives up the $10 deposit at that time.

Difference: largely from the concept will also understand. Futures trading contract, options trading purchase rights.

One is the risk, the risk of futures is greater, the investor's income or loss will change with the price change. Because futures have a daily settlement system; but the options risk is only on the margin, the amount of margin is based on the price of the goods. Again the risk is high and of course the income is also high.

In one case, the buyer and seller of futures must fulfill their contractual obligations on the settlement date. But in options, the buyer can choose to fulfill or not fulfill the contract.