What is future and option trading wiki

Options vs. Futures: What’s the Difference?

 

what is future and option trading wiki

Speculation Trading: They simply try to make a profit by trading futures contract that is buying future contract when they expect price to rise and selling when expect price to fall. In other words, they invest in futures merely to make profits by buying at low and selling at a higher price. Feb 18,  · The futures option in Stock market trading is an option contract where the principal is a single futures contract. It is a uniformed contract which provides the delivery of a specific quantity of product at some time in the future at a predetermined price. Chapter Difference between Futures and Options. Futures and options are tools used by investors when trading in the stock market. As financial contracts between the buyer and the seller of an asset, they offer the potential to earn huge profits. However, there are .


Difference between Futures and Options | Kotak Securities®


Origin[ edit ] The Dutch pioneered several financial instruments and helped lay the foundations of the modern financial system. Among the most notable of these early futures contracts were the tulip futures that developed during the height of the Dutch Tulipmania in This contract was based on grain trading, and started a trend that saw contracts created on a number of different commodities as well as a number of futures exchanges set up in countries around the world.

In this vein, the futures exchange requires both parties to put up initial cash, or a performance bond, known as the margin. Margins, sometimes set as a percentage of the value of the futures contract, must be maintained throughout the life of the contract to guarantee the agreement, as over this time the price of the contract can vary as a function of supply and demand, causing one side of the exchange to lose money at the expense of the other.

To mitigate the risk of default, the product is marked to what is future and option trading wiki on what is future and option trading wiki daily basis where the difference between the initial agreed-upon price and the actual daily futures price is re-evaluated daily. This is sometimes known as the variation margin, where the futures exchange will draw money out of the losing party's margin account and put it into that of the other party, ensuring the correct loss or profit is reflected daily.

If the margin account goes below a certain value set by the exchange, then a margin call is made and the account owner must replenish the margin account.

This process is known as marking to market. Thus on the delivery date, the amount exchanged is not the specified price on the contract but the spot value since any gain or loss has already been previously settled by marking to market. Upon marketing, the strike price is often reached and creates lots of income for the "caller. Unlike use of the term margin in equities, this performance bond is not a partial payment used to purchase a security, but simply a good-faith deposit held to cover the day-to-day obligations of maintaining the position.

The clearing house becomes the buyer to each seller, and the seller to each buyer, so that in the event what is future and option trading wiki a counterparty default the clearer assumes the risk of loss. This enables traders to transact without performing due diligence on their counterparty. Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position.

Clearing margin are financial safeguards to ensure that companies or corporations perform on their customers' open futures and options contracts. Clearing margins are distinct from customer margins that individual buyers and sellers of futures and options contracts are required to deposit with brokers.

Customer margin Within the futures industry, financial guarantees required of both buyers and sellers of futures contracts and sellers of options contracts to ensure fulfillment of contract obligations. Futures Commission Merchants are what is future and option trading wiki for overseeing customer margin accounts, what is future and option trading wiki.

Margins are determined on the basis of market risk and contract value. Also referred to as performance bond margin, what is future and option trading wiki. Initial margin is the equity required to initiate a futures position, what is future and option trading wiki. This is a type of performance bond. The maximum exposure is not limited to the amount of the initial margin, however the initial margin requirement is calculated based on the maximum estimated change in contract value within a trading day.

Initial margin is set by the exchange. If a position involves an exchange-traded product, the amount or percentage of initial margin is set by the exchange concerned.

In case of loss or if the value of the initial margin is being what is future and option trading wiki, the broker will make a margin call in order to restore the amount of initial margin available. Calls for margin are usually expected to be paid and received on the same day, what is future and option trading wiki.

If not, the broker has the right to close sufficient positions to meet the amount called by way of margin. Some U. The Initial Margin requirement is established by the Futures exchange, in contrast to other securities' Initial Margin which is set by the Federal Reserve in the U. A futures account is marked to market daily. If the margin drops below the margin maintenance requirement established by the exchange listing the futures, a margin call will be issued to bring the account back up to the required level, what is future and option trading wiki.

Maintenance margin A set minimum margin per outstanding futures contract that a customer must maintain in their margin account. Margin-equity ratio is a term used by speculatorsrepresenting the amount of their trading capital that is being held as margin at what is future and option trading wiki particular time. The low margin requirements of futures results in substantial leverage of the investment.

However, the exchanges require a minimum amount that varies depending on the contract and the trader. The broker may set the requirement higher, but may not set it lower.

A trader, of course, can set it above that, if he does not want to be subject to margin calls. Performance bond margin The amount of money deposited by both a buyer and seller of a futures contract or an options seller to ensure performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit. Physical delivery is common with commodities and bonds. In practice, it occurs only on a minority of contracts.

Most are cancelled out by purchasing a covering position—that is, buying a contract to cancel out an earlier sale covering a shortor selling a contract to liquidate an earlier purchase covering a long. A futures contract might also opt to settle against an index based on trade in a related spot market. ICE Brent futures use this method.

Expiry or Expiration in the U. For many equity index and Interest rate future contracts as well as for most equity optionsthis happens on the third Friday of certain trading months.

This is an exciting time for arbitrage desks, which try to make quick profits during the short period perhaps 30 minutes during which the underlying cash price and the futures price sometimes struggle to converge.

At this moment the futures and the underlying assets are extremely liquid and any disparity between an index and an underlying asset is quickly traded by arbitrageurs.

At this moment also, the increase in volume is caused by traders rolling over positions to the next contract or, in the case of equity index futures, purchasing underlying components of those indexes to hedge against current index positions.

On the expiry date, a European equity arbitrage trading desk in London or Frankfurt will see positions expire in as many as eight major markets almost every half an hour. Pricing[ edit ] When the deliverable asset exists in plentiful supply, or may be freely created, then the price of a futures contract is determined via arbitrage arguments. This is typical for stock index futurestreasury bond futuresand futures on physical commodities when they are in supply e.

However, when the deliverable commodity is not in plentiful supply or when it does not yet exist — for example on crops before the harvest or on Eurodollar Futures or Federal funds rate futures in which the supposed underlying instrument is to be created upon the delivery date — the futures price cannot be fixed by arbitrage.

In this scenario there is only one force setting the price, which is simple supply and demand for the asset in the future, as expressed by supply and demand for the futures contract. Arbitrage arguments[ edit ] Arbitrage arguments " rational pricing " apply when the deliverable asset exists in plentiful supply, or may be freely created. Here, the forward price represents the expected future value of the underlying discounted at the risk free rate —as any deviation from the theoretical price will afford investors a riskless profit opportunity and should be arbitraged what is future and option trading wiki. We define the forward price to be the strike K such that what is future and option trading wiki contract has 0 value at the present time.

Assuming interest rates are constant the forward price of the futures is equal to the forward price of the forward contract with the same strike and maturity. It is also the same if the underlying asset is uncorrelated with interest rates.

Otherwise the difference between the forward price on the futures futures price and forward price on the asset, is proportional to the covariance between the underlying asset price and interest rates. For example, a futures on a zero coupon bond will have a futures price lower than the forward price. This is called the futures "convexity correction.

 

Option (finance) - Wikipedia

 

what is future and option trading wiki

 

An option gives the buyer the right, but not the obligation, to buy (or sell) a certain asset at a specific price at any time during the life of the contract. A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver. Speculation Trading: They simply try to make a profit by trading futures contract that is buying future contract when they expect price to rise and selling when expect price to fall. In other words, they invest in futures merely to make profits by buying at low and selling at a higher price. Feb 18,  · The futures option in Stock market trading is an option contract where the principal is a single futures contract. It is a uniformed contract which provides the delivery of a specific quantity of product at some time in the future at a predetermined price.