Learning the basics of options trading can be very confusing at first, especially as a beginner. Table of contents preface 5 acknowledgements 9 chapter 1. Futures and options markets an introduction colin a. Cash market prices plus interest also called cost of carry. Mgex is the only authorized futures market for hard red spring wheat. And, although futures use contracts just like options do, options are considered lower risk due to the fact that you can withdraw or walk away from an options contract at any point. Only advanced options concepts and strategies require complex mathematics. Options and futures are both financial products investors can use to make money or to hedge current investments. A long position in a futures contract plus a short postiion in a call option. Derivatives are products that are linked to the value of an underlying share or index. To understand and valuate the basic derivatives and their applications in the financial risk. Chapter 12 forwards, futures, futures options, and swaps contents.
But derivatives like futures and options can help them protect their goals, even if prices move in the wrong direction. Introduction to index futures and options index futures and options allow investors exposure to movements in a range of australian indices or index sectors in one single transaction. Buying options allow one to take a long or short position and speculate on if the price of a futures contract will go higher or lower. As stated on the last slide, one option contract controls 100 shares of the underlyings stock 2.
Our attempt here is to explain the basics of futures and options as simply as possible. Options can be used to hedge downside risk, speculation, or arbitrage markets. An option is the right, not the obligation, to buy or sell a futures contract at a designated strike price for a particular time. When people and companies come to futures exchanges to buy and sell commodities and financial products, what theyre really trying to do is remove risk from their business or make money as an investor when prices fluctuate. This allows investors to invest or divest in up to 200 of australias largest stocks without the need to buy or sell any shares. The futures market can turn a nickel into a fortune, a fortune into massive debt and as an added bonus has quite efficiently exposed. You can purchase an option for significantly less than purchasing the underlying stock outright. In the class of equity derivatives the world over, futures and options on stock indices have gained more popularity than on.
A short hedge is one where a short position is taken on a futures contract. The two basic types of options are call options and put options. Learn how options work, how they are constructed, what key option terms mean and which features make options on futures unique. Our attempt here is to explain the basics of futures and options as simply as. In the class of equity derivatives the world over, futures and options on stock indices have. Option an option on a futures contract is the right, but not the obligation, to buy or sell a particular futures. Derivative is a product whose value is derived from the value of one or more basic variables, called bases underlying asset, index, or reference rate, in a contractual manner. Options trading basics explained for beginners youtube. Grades will be determined using the plusminus system. In this chapter, we focus on understanding what do futures mean and how best to derive the most from. But these days, farm commodities comprise just one of the following six basic types of cme futures contracts. The video starts by discussing the benefit of trading options, which is the ability to leverage.
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