Over the past 10 years or so, derivative trading has become very popular and is now a recognized financial industry. Almost all assets are now traded through Futures and Options, the primary derivative instruments. Yet, despite their popularity, they continue to be poorly understood, with many people believing that options and futures are the same thing. This is something that Steve Buzzi wants to properly address, thereby increasing the chances of financial success.
Options and Future
An option is a derivative that gives you the right to sell at a fixed price, without being obliged to do so. The fixed price is called the “strike price”. In options trading, you can choose lots of expiration dates and strike prices, which makes it a very versatile market. You can be conservative or aggressive, whichever you believe will be more beneficial.
A future, however, is a type of derivative that binds you to sell or buy the asset at a fixed price. This means that when the future matures, you will have to sell or buy the asset. The leverage is set at a fixed level based on the initial margin that was used when the contract was agreed. It is not as versatile, therefore, and the loss potential is unlimited, making them quite risky.
Different Types of Options and Futures
Options and futures can now be obtained on a variety of assets. Stocks, indexes, forex, and commodities all exist. In fact, you can even take out an option on a future! With options, there are call and put solutions in place. With a call option, you can buy at a fixed price if you want, meaning you profit if the price goes up.
With a put option, you can sell the asset if you want at a fixed price. This means that you profit if the asset’s price drops. Loss is limited to how much money you put in, you don’t have to pay a margin, and you don’t have to short the asset. Hence, a lot of people prefer this method to speculate on asset prices dropping.
Then, there are exotic options. These are very complex in terms of their functions and conditions and experts like Buzzi only recommend them to investors and traders who really know what they are doing, and who are in a position to lose whatever money they put in. Binary options, for instance, are common exotic options. These are, in fact, very popular, but they require very quick actions. Sometimes, the lifespan of a binary option is just 15 minutes.
Future contracts are less complicated, because you can either go long (buy the asset) or short (sell the asset). When you go short, you profit if the asset’s price drops, because someone already committed to buying it at a higher price. When you go long, you profit if the asset price rises, because you are committed to buying it at a lower price.
Of course, this is a very simple explanation of derivatives and the difference between options and futures. That said, all strategies must start with a basic understanding.