Options

There are two types of options - CALLS and PUTS. The buyer of a CALL option acquires the right, but not the obligation, to buy the underlying asset at a fixed price. Call options generally rise in value if the price of the underlying asset rises. The buyer of a PUT option acquires the right, but not the obligation to sell the underlying asset at a fixed price. Put options generally rise in value if the price of the underlying asset falls. The buying of options involves limited risk - that is to say you cannot lose any more than the premium paid at outset.

It is also possible for you to write or sell options. The writing of call options, although having a wide range of uses, is a potentially high-risk strategy requiring a high degree of product knowledge. Since exercise can involve the writer in a substantial financial commitment, option writers are required to deposit margin with the broker to ensure the obligation of the contract can be met in full if required.

An option can be granted over many assets - including soft and agricultural commodities, bonds, shares and share indices. Equity options are financial instruments who's price movements are derived from the price movements of an underlying share price or index and hold a host of investment opportunities for you as a private investor. Whilst options on individual equities allow investors to gain exposure to specific shares, index options allow investors to gain exposure to the UK stockmarket in one transaction.

Futures

A futures contract is a standardised contract to buy or sell a specified asset at a pre-agreed price on a pre-agreed date. It is akin to a cash transaction with the final element - settlement - being deferred.

Nowadays most futures contracts are transacted on a recognised exchange using a broker, with the quality and quantity of the underlying asset standardised. Additionally, the exchange specifies the dates (or range of dates) within which deals must be settled, so assisting trading and ensuring liquidity. Futures contracts that are not exchange traded are known as 'over the counter' or 'OTC' products.

 


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