Why Trade Futures and Options

Futures and options are classified under the derivatives financial instruments category. The derivatives have been in operation since time immemorial and have become more popular in the recent past. This is despite the fact that they have been faced with lots of criticism, with allegations that they make the markets prone to instability due to a lack of transparency.

The advantage of trading in futures and options is that the management of risks is improved and at the same time liquidity levels are increased. The value of the futures and options is based on another asset which is referred to as the underlying. This can be a stock or the market index.

An option is a derivative that gives one the right to buy or sell the underlying asset. There is no obligation. There are two types of options: call option and put option. The difference between the two is that the call option gives the investor the right to buy the asset whereas the put option is vested with the right to sell the underlying asset.

There is a mutual agreement known as the option contract which gives the price for buying and selling the underlying asset. The option contract also gives the expiry date when the contract will be no longer valid. Options can be exercised in the American and European styles. With the American style the option can be exercised before the expiry of the contract whereas the in European style the options can be exercised during the date of expiry.

Futures refers to a standardized and tradable contract which requires settlement at specified prices and on specified dates. Futures is more risky than options as it has an obligation to buy. Commodities can also be used like gold and crude oil to settle the transaction.

Trading in futures can be done in a number of ways. These include squaring off which means taking the opposite option of the agreement. Delivery option where there is physical delivery of the asset. For example if your future guide has involved the sale of a particular amount of gold then you give the real gold to the buyer at the agreed time. Cash settlement involves paying the difference of the futures and spot price of the asset on cash terms

A futures trading guide is paramount to any individual as it enables one to understand the rules of the trade because in futures trading one can obtain a profit based on the speculation of the price movements. For example a profit of 400 can be achieved if you purchase futures for 3700 and sell at 4100. The futures trading guide enables one to know that this trading requires caution because it involves calculated bets on the movements of the asset being traded on. It is also vital to research on both the derivative and underlying assets. The changes in the price of the underlying has effects on the investment hence the reason why the futures trading guides are important so as you know how to go about trading futures.