Information on trading future options

Information on trading futures and options.

What is "future option trading"? It is an option on a futures contract. But to understand it, we need to understand what an "option" is first. So what is an "option"?

An "option" is the right, but not the obligation, to buy or sell a specific amount of a given stock, commodity, currency, index, or debt, at a specified price during a specified period of time. The specified price is often referred to as the "strike price".

When trading is done in the stock market, the amount is usually 100 shares. In each option, there is a buyer, who is referred to as the holder and a seller, who is known as the writer. If the option contract is exercised, the writer is responsible for fulfilling the terms of the contract by delivering the shares to the appropriate party. In the case of a security that cannot be delivered such as an index, the contract is settled in cash.

For the holder, the potential loss is limited to the price paid to acquire the option. When an option is not exercised, it expires. In such cases, no shares change hands and the money spent to purchase the option is lost. For the buyer, the upside is unlimited.

So now that we know what "option" trading is, let us see what "future" trading is.

Futures trading take place when two parties enter into an agreement to trade an item at a future date. They then speculate on the prices of that item at that date. In other words, the prices are decided today and the item is to be delivered at a future date. In the meantime, the prices of the item may increase, decrease or remain the same. But the buyer and the seller are bound to honor the deal as they have entered in to a futures agreement.