Futures and Options

Subject: Economy

Section: Capital Market

Content:

Options

An option gives the buyer the right, but not the obligation, to buy (or sell) an asset at a specific price at any time during the life of the contract.
They tend to be fairly complex, options contracts tend to be risky. Both call and put options generally come with the same degree of risk. When an investor buys a stock option, the only financial liability is the cost of the premium at the time the contract is purchased.
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.
They are preferred by

Futures

A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date unless the holder’s position is closed prior to expiration.
Options may be risky, but futures are riskier for the individual investor. Futures contracts involve maximum liability to both the buyer and the seller
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.
Futures contracts tend to be for large amounts of money. The obligation to sell or buy at a given price makes futures riskier by their nature.
They are preferred by speculators.