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Trading In Future Options

Aug 17, 2007
A customized contract drawn between two parties to buy or sell a predetermined quantity of a particular commodity's given amount at a predetermined future date is known as a forward contract. Exchange-trade forward contracts on futures for example are stock or commodity exchanges. The exchange standardizes the terms of the exchange.

There are several standardized items involved in any futures contract. They are: the month and date of delivery; the quality of the underlying product (for financial futures they are not required); the quantity of the underlying product; minimum change of price (called 'tick-size'); price quotation on the units (not the price itself); and finally the settlement location.

Concerning futures, once the trade is confirmed between two members of the exchange, the exchange house becomes the counter-party and guarantees every trade. With the market reporting of volumes and price being standardized futures contracts are more fluid and their price clearer. Any member of the exchange has the ability to reverse a futures contract. A Contango market is when the futures contracts are priced
above the spot price. Should the price of the futures frequently fall below the spot price it is known as a Backwardation. A call option is an option to buy, and is purchased in expectation of rising prices. A put option or sell option is purchased to protect investment profits against the expectation of a falling price.

The use of options, like futures, give both individuals and firms a hedge against the risk in wide price fluctuations. This gives speculator the opportunity to gamble for greater profits with limited liability. With future contracts there are no up front costs (called the Premium) to enter, unlike an options contract that has immediate costs upon entering.

As with any investing you must weigh the risks versus rewards before setting forth.
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