A future is a contract to buy or sell something in the future at a fixed date. This is used to lock in a future price for something now.
For example, an airline knows they will need a huge amount of fuel every month so they will buy futures contracts of fuel which lock in a price in the future. By buying the future, they protect themselves against price rises in the interim.A company that produces fuel will sell futures to lock in prices and protect themselves against future price drops. A future is sometimes called a swap because the two parties have swapped a floating price for a fixed price.
Calls and puts are options contracts. They give the holder the ability to buy (call) or sell (put) something for a fixed price at some point in the future. They act more like insurance, in that to buy it you pay a small fee (like the insurance premium) even if you exercise the option or not.
Options can be used to manage risk. An airline might buy call options for fuel in the future. If the spot price goes above the option price, they will exercise it and be ‘insured’ against the increase. But to do this they had to pay initially to buy the options. The reverse is true if you are trying to sell something with a put option.
They can also be used for speculation to make money. If you think apples will go up in price, you can sell put options (because you will earn the premium) or buy call options (because you can lock in a lower price).
It’s like making deals with future-you.
Futures: “Lock it in now, deal with it later.”
Calls: “Stock go up? I win.”
Puts: “Stock go down? I win.”
Risky? Yeah. Cool? Also yeah.
Comments
A future is a contract to buy or sell something in the future at a fixed date. This is used to lock in a future price for something now.
For example, an airline knows they will need a huge amount of fuel every month so they will buy futures contracts of fuel which lock in a price in the future. By buying the future, they protect themselves against price rises in the interim.A company that produces fuel will sell futures to lock in prices and protect themselves against future price drops. A future is sometimes called a swap because the two parties have swapped a floating price for a fixed price.
Calls and puts are options contracts. They give the holder the ability to buy (call) or sell (put) something for a fixed price at some point in the future. They act more like insurance, in that to buy it you pay a small fee (like the insurance premium) even if you exercise the option or not.
Options can be used to manage risk. An airline might buy call options for fuel in the future. If the spot price goes above the option price, they will exercise it and be ‘insured’ against the increase. But to do this they had to pay initially to buy the options. The reverse is true if you are trying to sell something with a put option.
They can also be used for speculation to make money. If you think apples will go up in price, you can sell put options (because you will earn the premium) or buy call options (because you can lock in a lower price).
It’s like making deals with future-you.
Futures: “Lock it in now, deal with it later.”
Calls: “Stock go up? I win.”
Puts: “Stock go down? I win.”
Risky? Yeah. Cool? Also yeah.
This has been asked before.