Futures and options are another hot investment that many investors are finding interest in. A future contract (its complete name) is a standard documentation that obliges the seller to sell a specified asset on a future pre-determined date at a price decided today or rather on the date of sale. Futures are traded on exchanges similar to that of stocks and bonds, called futures market. Here the seller is given the designation of short position while the buyer is given the designation of the long position.
Similar to the other markets, futures are traded through future brokers or directly in futures market. Moreover, one can even make do without brokers with the help of futures trading platform and future trading systems. These automated online systems take care of many of the functions that brokers perform and even suggest futures trading strategies to invest.
The price of futures trading is determined depending on the supply demand effect on futures market. In the market there are buy and sell orders for each future and depending on the instantaneous demand and supply, the price of each stock market futures is settled today. It is not necessary that the asset being considered in the future be actual commodities or rational items rather it can also be other securities, currency or even interest rates and stock indexes. Every future is finally realized on the closing date called the settlement date and the commodities are handed over at the predetermined price on that date.
Many people do get confused between forward contracts, futures and options. These three things are often considered as the same thing by many non-investors and are even sometimes jumbled up by investors as well. Now that futures have been discussed in brief, understanding the differences between the three is easier. Forwards are not future traded and not always on standardized contracts unlike Futures. Second, Forwards are the type of contracts in which the loss or gain is received only after maturation of the contract and there is no interim payments doled out. However, true-ups are common in futures. These are intermediate partial settlements given out in-between the maturity period.
A commodity futures is an obligation on both parties to meet the terms and conditions of the contract whatsoever. However, options are not an obligation but just a right to by commodities at a price fixed today in the future. Neither party is obliged to do anything in an option. Specifically speaking the owner of the commodity futures contract has the right to exercise his or her right. In a future, both the parties have to fulfill their pre-decided commitment. In case, of a future, to exit the agreement early before settlement date, the owner has to sell the future to another party or has to receive from the short position. On the other hand, the short position has to buy back the future from the holder. This is where the futures trading software and exchange play a crucial role. It is their duty to ensure that all settlements take place legally and properly.