Options Contracts (and Futures Contracts)
Options and futures contracts are financial agreements that derive their value from an underlying asset and are used to gain exposure to price movements without owning the asset directly.
Definition
Contracts, in the context of options and futures, are standardized financial agreements whose value is based on an underlying asset such as commodities, equity indexes, or financial instruments.
Futures contracts obligate participants to buy or sell an asset at a specified price on a future date, while options contracts grant the right, but not the obligation, to buy or sell a futures contract at a predetermined price within a set time period.
How It Works
Futures contracts track the price of an underlying asset and require fulfillment at expiration unless closed earlier. Their value moves directly with the underlying market.
Options on futures allow traders to gain exposure by paying a premium. A call option benefits from rising futures prices, while a put option benefits from declining futures prices. Option writers receive the premium and assume the obligation defined by the contract.
Why the Term Matters
Contracts form the foundation of derivatives markets and allow participants to express views on price direction, volatility, and market expectations.
Understanding how options and futures contracts work clarifies how risk, leverage, and price discovery function across global financial markets.
Related Concepts
- Futures Contracts
- Options Contracts
- Call Option
- Put Option
- Contract Expiration
- Premium
FAQs
What is a futures contract?
A futures contract is an agreement to buy or sell an asset at a predetermined price on a specified future date.
What is an option on a futures contract?
An option on a futures contract gives the holder the right, but not the obligation, to buy or sell a futures contract at a set price.
What does a call option on futures represent?
A call option on futures represents the right to benefit from rising futures prices.
What does a put option on futures represent?
A put option on futures represents the right to benefit from falling futures prices.
What is an option premium?
An option premium is the price paid by the buyer to acquire the rights granted by the option contract.
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