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Futures & Options

Futures Trades
Are defined as a standardised, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date. One of the most widely traded derivatives of today; Futures are normal buy or sell contracts, exercisable at a future date (the delivery date) and typically will run for up to 12 months. When that delivery date falls due, the holder of the futures contract is obliged to take or make delivery of the product specified within the futures contract. Futures contracts are transferable between parties.

The Contract Becomes The Product
If the contract – whether to buy or to sell – has been drawn at an advantageous price, the contract itself develops a value as it represents a potential profit. Therefore, the contract itself can be traded on a futures exchange as a product in its own right. Over 2 million futures and options contracts are traded every business day on Euronext.Liffe (the London futures exchange).

Futures vs. Options
Options are contracts that give its owner the right, but not the obligation, to earthier buy or sell a specified underlying asset at specified price for a specified date in the future.  An options contract is very similar to a futures contract. The essential difference is that a futures contract MUST be traded on the delivery date, whereas delivery is optional for an options contract. An Option contract conveys the right, but not the obligation, to engage in a future transaction on an underlying security at a fixed price. For example, a call option provides the right to buy some amount of a security at a set strike price at some time on or before the expiration date, while a put option provides the right to sell. The decision on whether to exercise the right to buy or sell will depend upon the value of the underlying security at the time and whether this will result in a profit or not.

Equities or Commodities
Futures are available both on equities and commodities. One can create a futures contract for British Airways, Google, a barrel of oil or a tonne of wheat. Similarly one can trade, on the Chicago Mercantile Exchange, 50,000 lbs of frozen pork bellies!

Like other derivatives, investors trading in Futures & Options almost never take possession of the underlying instrument, be it a Microsoft share or a barrel of oil. Since the underlying instrument has a positive value, to trade in a future one does not need to finance the entire value of the trade, but only provide a deposit on the trade, allowing to gear their investment to multiply their gains (and, potentially, losses).

Similar to other derivatives, Futures & Options possess a hedging characteristic. The duration of a contract can vary considerably, especially for commodities where they are widely used by consumers of that commodity to hedge against future price rises. In such a case, an electronic engineering company, for example, might be buying copper futures to ensure that it has an ongoing supply of copper at a predictable price for the components it makes. Furthermore, they can be used to hedge positions in underlying equity transactions.

Private Investors
Previously restricted to commercial and financial institutions, futures and options contracts are now traded successfully by private investors. It is an area where YTM Stockbrokers’ clients are very active, and where gearing can help multiply returns and hedging characteristics can help protect portfolios significantly.

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