Future is a contract in which two parties agree to exchange physical commodity or a set of financial instruments on an exact future date at a particular price.
It is very clear that farming is a very seasonal job and this is where the problem originated. Suppose you would like to buy a car and somehow it happens that a neighbor from the street is selling one just of your tastes. Even if both derivative instruments are not suitable for risk averse traders or investors and are complex by nature, they are primary instruments for managing price risks.
When farmers grew their crops and brought them to the market, current supply often exceeded the demand heavily, pushing the price of crops down and leaving farmers with unsold crops. The problem is that the price of the car is $20,000 and you just don't have the money in your pocket right now. That is why futures options trading is not only in domain of producers and consumers, but also speculators play a great role in this market.
Both instruments can be very useful for a wide range of people, but first you have to learn basics about these instruments, how both markets work, what characteristics these instruments have, which strategies you can use to trade them and more.
Options on the other side give the buyer the right to buy or sell the underlying asset at a particular price on or before determined future date. On the other side, in the of-season time, these same crops were hard to get; demand exceeded supply and pushed the prices of the crops to the sky, because the crop was no longer available. You go to your neighbor and tell him that you will probably buy a car, but only after three months time, when you expect your bank to release one of your saving schemes. With sufficient knowledge even complex things become simple and that is what we would like to achieve with the articles we publish and are related to this topic. To balance the market, central marketplaces were established where farmers could sell their commodities for immediate delivery (spot contract) or forward delivery (forward or future contract).
Both futures options trading is understood as derivative trading, since the price of both instruments derives its value from its underlying asset, which is most of the time a commodity in case of futures, and stock or index in case of options.
This way the farmers were prevented from losing crops and profit, while the prices of the crops stabilize in the off-season.
Just before the three months period has ended you get the money from the bank and now you have to decide, to buy a car or not.
Today you can trade futures not only on agricultural commodities, but also financial instruments like bonds, currencies and securities.
If for example car sellers just went out with big selloff of their new models (same car, new model) with very attractive prices and paying possibilities and you suddenly can get a new car, new model for the same price as you can get the old car, old model from your neighbor, you will probably step away from the contract with your neighbor and not exercise the option you had. Because of this fact the prices of old cares of the same model has grown significantly on the market and you will be more than happy to exercise the option you have to buy this car for 'only' $20,000, while the normal price is currently around $25,000.
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