Futures and options
Sometimes it is difficult to understand something only because it is written difficult and confusing language. However, if you put the same easy and accessible, everything is in its place. From this article you can learn about how and what is it used for futures and options on the example of the simple answers to simple questions.
So, let's begin. Question # 1. Why do we need futures and options? The answer is very simple: in order to earn money.
Question # 2. As futures and options help you make money? With the help of the usual games on changes in prices, that is speculation. For example, you can buy a batch of chocolate at a low price and then resell at a higher. Or realize the chocolate at a higher price, then to buy as cheap and as a result also make a profit.
Question # 3. Is there a difference between futures contracts on the goods and the goods? (In other words, is it to buy futures on chocolate instead of the chocolate?) The difference lies in the fact that the purchase of a futures contract for the goods does not mean the acquisition of real goods - this is just a game with a view to make a profit on price change in the future. Specified in a future goods should be delivered or paid not immediately, but only after some period of time. It may be several weeks or even months. If the buyer of the futures is not planning to actually deliver or acquire goods during this time, he can just sell the futures. If the successful deal he earns the money, while I won't spend a single kopeck.
For example, the buyer assumes that the price of the chocolate will grow in two months. If he wants to invest money in the real goods, he needs to take a loan in a Bank, which then must be repaid with interest, and spend money on transportation of chocolate and Deposit it in the warehouse. But if he will acquire a futures contract, no additional costs will not be required, and therefore, he made a profit in full.
Question №4. Can I use futures to obtain a real product? If you are a big fan of sweets, you only need to leave futures for themselves and, when the time comes, get your chocolate.
Question №5. In recent time a lot of talk about the Forex. Is there a futures advantages to Forex? The benefits are, and they are obvious. Futures can be compared to a big supermarket in the city centre, which offers several thousand kinds of products. Forex on his background seems a little shop on the outskirts of the range of a few tens of kinds of the goods, where you furthermore may handle or обвесить. On the stock exchange, selling futures, as in a large supermarket, runs its own service of control of the procedure, called the clearing system. Its employees are watching pricing, observance of rules of trade, timely execution of contracts. Brokers-violators can outwit and punish only themselves.
The advantages described above can be attributed to the options, and so the next question. Question №6. What are the options? The most appropriate comparison would be the insurance policy. But if policy, such as medical, insures us from the disease, then the option to insure against adverse price shock.
Question # 7. How you can use the option? Two ways. Taking advantage of the option as insurance of growth or falling of the prices, you can prevent the related losses. Brokers have called this method of hedging. The second option of options is in the usual speculation, the purpose of which is to gain profit from price changes of the goods.
Question # 8. Can you describe in more detail the processes of hedging and speculation? Please. Let's start with hedging.
For example, we need to buy oil for the refinery. We know that at the moment the price of oil had fallen somewhat, and is $50 per barrel. However, if to believe the forecasts, after some time we can expect increase of the prices by $10 per barrel. If we buy oil and tag it to the warehouse, and the forecasts will not come true and the prices down, we lose part of the money. If we insure themselves purchase option, you will benefit regardless of the fall or rise the price. Explain why.
For example, we bought the option value of $1000, according to which during 3 months, we can get 6000 barrels of oil at the price of $55 per barrel. In case of increase of the price up to $60 our economy will: 6000 barrels * $5 (the difference in price for 1 barrel) = $30000. With a net value of the put option the total profit of $29000.
If the price falls below $55, we just buy the right number of us oil on the regular market, and with a call option, can easily leave, because purchasing it does not bind us any obligations.
But if our work is only to speculation on the prices of oil, the having learnt about the forthcoming growth of prices, we need to rush to buy option as cheap as possible. For example, bought us the option value of $800 worth the price of $56 per barrel. Waiting for the price increase to $58, we will be able to bail out the option for a $2000 more than its original value!
Question №9. What is it connected with the growth of prices for the options? The purpose of the purchase option is often its subsequent resale, the date of which the option price changes. In addition, the prices depend on the period of time for which the purchased option. Continuing the comparison with insurance policies, you will notice that the insurance policy auto liability for a period of 1 month is much cheaper policy for the period of 1 year. There are other reasons, related to the peculiarities of pricing and options trading, but it is a topic for another article.
If you are interested in the described prospects, you can always proceed to more detailed study of the theory and practice of options trading and futures.
