Stock market futures and options explained - SHARENET - Your Key To Investing on The JSE Securities Exchange - South Africa
Trading options on the derivatives markets gives traders the right to buy CALL or sell PUT an underlying asset at a specified price, on or before a certain date with no obligations this being the main difference between options and futures trading.
Another common derivative used in a contract setting when trading are swaps, they allow both parties to exchange sequences of cash flows for a set amount of time. They are not exchanged or traded xnd but rather customized OTC contracts between two traders.
Originally derivatives were used to volume indicator trading system there would be a harmonious balance in exchange rates for goods and services traded on a global scale. Traders found that with differences in currencies and accounting systems it would be easier for traders to find a common derivatives market.
Nowadays, vutures main reason for derivatives trading is for speculation and the purpose of hedging, as traders look to profit from the changing prices of the underlying assets, securities stock market futures and options explained indexes.
Derivatives come in several different forms, such as the kinds used for hedging or minimizing risk. For example, a trader may want to profit from a decrease in an assets selling price sell position.
When he inputs a derivative used as a hedge it allows the risk associated with the price of the underlying asset to be transferred ftuures both parties involved in the contract stock market futures and options explained traded. Farmers generally regard the Safex grain futures markets with suspicion. They see them simply as a way for speculators to grow rich from money that farmers lose.
The truth is that a futures market enables producers and users of a product to insure against karket risk. Certainly, a great deal of money stock market futures and options explained generated on the grain markets. However, a large percentage of this is made by grain traders who enter into fixed-price contracts with farmers and then make a profit when prices change.
There are three parties involved in a futures market — sellers maize producers, or beef producers in the case of beef futuresbuyers grain millers, abattoirs and butcheriesand speculators. The latter are needed to balance the market. They are the risk-takers who make big profits, but who also stand to lose very large sums if the market turns against stock market futures and options explained.
The Safex grain futures markets trade more than 10 times the size of the South African maize crop. Maize producers can use the maize futures to lock in minimum prices for specific delivery months, while maize users can use the market to lock in maximum selling prices for maize.
An insurance policy Many farmers say that they do not like to speculate. The use of grain futures to insure against adverse price movement is similar to taking out short-term insurance on your bakkie.
If the bakkie is scrapped in an accident, the insurer will pay out the market value to you. But if you are never involved in an accident, you do not regard the insurance premium as money lost.
Investors only exercise contracts when they are in the money.
If the option is out of the moneythe contract buyer is under no stock market futures and options explained to purchase the stock. Purchasers of fuyures contracts are obligated to buy the underlying stock from the seller of that contract upon expiration no matter what the price is of the underlying asset.
Still, it is very rare for stock futures to be held to their expiration date.
Stock options provide investors with both the right to buy a stock but not the obligation and the right to sell the same stock but not the obligation through calls and puts, respectively. But stock options also provide investors with a breadth markett flexible strategies unavailable through futures trading.
Each strategy offers different profit potentials for investors and speculators. Stock futures, on the other hand, offer very little flexibility once a contract is opened.
Description:Derivative Markets Explained Workshop The development of the market in South Africa Distinguishing between forward contracts, futures and options Index futures pricing and applications; Single stock futures pricing and applications.