Future & Options

Futures contracts typically represent a larger investment in the underlying asset, from the standpoint of a legal obligation, if not actual money laid out. The contract requires the buyer to either purchase the 'goods' by the deadline (which is rare), or sell the contract to another party. So, the financial obligation is, at least in principle, potentially very large.future

The risk in options is therefore lower, with the amount limited to the premium cost. Nevertheless, few traders actually take delivery of several tons of wheat or a few thousand barrels of oil. The contracts typically are actively traded until just before settlement time, at which time a buyer - one appropriate to that commodity - purchases the actual goods and re-sells them.

Similarly, only a small percentage of options traders actually take delivery of the underlying shares of stock, bond certificates, commodity or other instrument. (Some do, such as employees of companies granting options as part of employment compensation packages

Futures contracts exist on non-physical 'goods' as well - such as index futures, bond futures, even futures on options!

A futures contract gives its buyer the obligation to purchase the underlying asset and the seller to sell (and deliver) it at a preset date. (If the futures holder liquidates his position prior to expiration, the delivery clause is voided, obviously.)

By contrast, an options contract, whether a call (buy an asset) or put (sell an asset), grants the holder the right - but not the obligation - to exercise the option. The holder is entitled to simply let the option expire without investing further.

Investors can enter futures contracts without inputing any funds (ignoring any commission), but an option always carries a cost - the 'premium'. (Note: This is only partially accurate since, in practice, futures contract buyers typically put down a deposit of around 10% of the price of the underlying asset. But the futures contract itself doesn't cost anything but a small commission.)

riskInherent Risk of Futures and Options Trading

An important factor to remember in dealing in futures and options is that they can be extremely risky and volatile. Even with the most sophisticated, state-of-the-art trading systems, you the trader however astute bear this risk. Never rely on a single source to base your investment decisions on. Your investments, after all, may thrive or vanish.

The investor should always perform complete and thorough research and analysis from multiple sources and always consult a professional before making any investment decisions.

Regulatory Agencies

Commoditiy Futures Trading Commission - regulatory agency of futures and options -- helps prevent futures and options fraud and abuse and promotes a healthier trading environment. (ctfc.gov)

National Futures Association (NFA) - Offers a Background Affiliation Status Information Center (BASIC), where investors can check a firms registration status. NFA also houses a learning center for trading information, certain, dispute resolutions and a place to file complaints. (nfa.futures.org)

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