Making Riskier Investments: Investing In Futures & Options

Futures are a commitment to buy (a call) or sell (a put) at a set price (the strike price) on a future date An option is similar but is a right rather than an obligation. Both are known by the collective term derivatives, because they derive from something else, such as a share in an individual company.

Because the price is only a fraction of the underlying share price, they are in effect highly geared and very risky.
If you think about trying futures or options (or any other form of risky investing), do some experimental dealing (paper trading) first, to see how successful you might be.

Universal stock futures (USFs) widen the availability of futures and options contracts to major US and European shares as well as UK shares.

Futures

In the case of futures, the cost of failure can be very high, unlimited in the case of a put (selling forward a share you do not have, which you will have to buy to deliver on the relevant date) because there is no limit to how high the share price can rise.

Investing in futures is not recommended unless you really know the market in that share.

Options

Options are less risky because there is no commitment and the most you can lose is the cost of the option.
Options can be of two kinds traditional, where no further action can be taken until the relevant date, and traded, where the option can be bought or sold throughout its life. Dealings are in units of 1,000 shares.

In addition to individual large company shares, options are available for the FTSE 100 index. Then there are other areas, such as commodities (see above).

Options have an intrinsic value and a time value. The intrinsic value compares the option price with the current share price. The option is ‘in the money’ when the option price is 선물옵션 the lower and ‘out of the money’ when it is higher than the share price.

The time value depends on the length of time the option has to run till the final exercise date.

Investing in options requires good knowledge of the market and a means of following the prices during the day, as urgent action may be needed.

Options can, however, be protective of your investments. if you think the market is going to fall, rather than sell all your shares you can sell options. If the market falls you make a profit on the options to set off against your share losses. If not then you let them lapse.

Similarly, if you expect to have money to invest at a later date, or you have to sell shares to raise some urgently needed cash and you think the market is going to rise, you can buy options.

These hedging techniques are protective of your investments, at a price. However, there are alternatives: combination strategies such as straddles, where you both buy and sell options at the outset, and other more sophisticated techniques, are available.

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