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Finance: Investing Guide

Futures & Options

Table of Contents

Derivative Terms

Definitions of the following terms are taken directly from Strauss’s Handbook of Business Information: A Guide for Librarians, Students, and Researchers, 2nd Edition by Rita W. Moss available in the Maag Stacks at call number
Z7164 .C81 S7796 2004.

Derivatives: Risk-shifting instruments. A derivative is a contract established by two or more parties where payment is based on (or “derived” from) some agreed upon value, which is established on the future value of an underlying asset, typically a commodity, bond, equity, or currency. Simply put, derivatives are instruments whose return depends on the return of other instruments. A derivative is a promise to transfer ownership at an agreed upon time in the future for an agreed upon price. A common property of derivatives is that the asset itself is not exchanged, only the change in value of the asset. Derivatives include a wide range of instruments including futures and options.

Futures: In the futures market, investors trade futures contracts, which are agreements for the future delivery of designated quantities of given products for specified prices. This market is meant to provide an efficient and effective mechanism to manage price risk. The market can be described as a continuous auction market. Futures are usually divided into two broad categories: commodities and financial. Futures are usually divided into two broad categories: commodities and financial.

Commodities Futures: Frequently commodities are bought and sold for delivery at a later time by means of futures contracts. A commodities futures contract is a legal agreement between buyer and seller that a specified number of units of the commodity being traded on a particular futures exchange will be delivered at a certain place, during a certain month, for an agreed upon price. Most traders choose to liquidate their contracts before delivery by arranging offsetting transactions to reverse the original actions. Each commodities exchange has a clearinghouse that oversees all buy and sell transactions and stands ready to fulfill a contract in the event of buyer or seller default.

Financial Futures: Financial futures trading began in the 1970s with the trading of futures contracts on selected foreign currencies and fixed income securities, such as Treasury bills. Since then, the diversity of products and trading volume has expanded considerably. Futures markets provide an arena in which companies that are dependent on prices of basic commodities, exchange rates, or securities markets can reduce the risk of unfavorable price swings. For example, if an importer needs to pay large bills three months into the future, rather than take the risk that the currency markets will be favorable then, he could buy futures contracts to ensure that his prices will remain stable. Financial futures can also be used for speculating. Someone who expects interest rates to increase can buy interest rate futures.

Options: Give their holders the right to buy or sell certain securities, traditionally common stocks in 100 share units, at a set price by a certain, predetermined date regardless of how high or low the price of the underlying stock may move during that time. Holding an option is vastly different from owning the stock itself. Stock ownership represents part ownership in the issuing company, whereas an option merely gives its holder the right, which may or may not be exercised, to buy or sell stock at a predetermined price within a designated time period. An option holder has none of the rights of a stockholder. Options are issued or written by individual investors and security dealers, who retain ultimate responsibility for carrying out the terms specified in the options contracts. They are not written by the companies issuing the underlying stock. Options are attractive to many investors because they can be purchased for a fraction of the cost of the underlying stock and offer the opportunity for high profit with limited risk. Options risk is limited to a predetermined amount, the amount paid for the option itself. If the market should go against an option trader, the worst that can happen is that the option will expire and become worthless. Options action is fast. Most options expire at the end of three, six, or nine months.

Derivative Reference Resources

  • The CRB Encyclopedia of Commodity and Financial Prices REF HG6046 .C74 2009x
    This unique reference guide provides the “big picture” for anyone dealing in the commodity or financial markets by delivering long-term charts and written historical analysis, as well as supporting data on a CD-ROM. This book contains a wealth of authoritative data, all compiled by the Commodity Research Bureau (CRB), the organization of record for the commodity industry. The Encyclopedia is essential for anyone who needs commodity and financial charts, analysis, and data in one quick and easy-to-use reference book.
    >>Cover Image; Inside Flap; Table of Contents; Publisher Description; Author Notes

Commodities & Futures Exchanges

The Value Line Daily Options Survey

Derivative Web Resources

  • CFTC: Commodity Futures Trading Commission
    Congress created the CFTC in 1974 as an independent agency with the mandate to regulate commodity futures and option markets in the U.S. Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, protecting market participants against fraud, manipulation, and abusive trading practices, and by ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk.
  • Futuresmag.com: Education & Analysis for Financial & Commodity Traders
    Established in 1972, Futures magazine is the oldest and largest circulation publication serving the derivatives industry. Since its start the magazine has grown to cover not only the futures markets, but options, forex and stock markets as well. It is distributed world wide and covers not only all markets, but all geographical centers, with correspondents both in Europe and Asia.
  • Futures Magazine Online Source Book
    This business-to-business buyers guide highlights products and services such as floor brokers, commission merchants, trading systems, exchanges, price quotes, charting and cashforex services.
  • FutureSource.com
    Their objective is to provide free and accurate futures commodity quotes, charts, news and other relevant information.
  • Futuresweb.com
    Futures and options information. Within this website you will find: Quotes, Charts, Daily News, Futures Research, Futures Directory (A Commodity Futures search engine), Investment Books, Commodity Brokers, Commodity Quotes, Educational Information, and more.
  • INO: Investment News Online
    Specializes in the futures and options markets, serving traders worldwide with a continuous information service of quotes, charts and news. Also a storefront for trading tools, charts, publications, educational courses and other resources.
  • The Institute for Options Research
    Resources for serious options traders. Home of Ken Trester’s Option Master, Put and Call Tactician and The Complete Option Player. Free options trading advice, information and newsletter service.
  • NFA: National Futures Association
    NFA is the industrywide, self-regulatory organization for the U.S. futures industry. They develop rules, programs and services that safeguard market integrity, protect investors and help members meet their regulatory responsibilities. Membership in NFA is mandatory, assuring that everyone conducting business with the public on the U.S. futures exchanges-more than 4,200 firms and 55,000 associates-must adhere to the same high standards of professional conduct.
  • Optionetics
    Investment education resource. Since 1993, Optionetics has provided investment education services, portfolio management techniques, market analysis and online trading tools to over 250,000 people from more than 50 countries.
  • The Options Industry Council
    The OIC was created to educate investors and their financial advisors about the benefits and risks of exchange-traded equity options. Options are a versatile but complex product, and that is why OIC conducts hundreds of seminars and webcasts throughout the year, distributes thousands of interactive CDs and brochures, and maintains a Web site and Help Desk focused on options education.
  • The Option Strategist
    Options trading resources, advice and commentary from Lawrence G. McMillan, best selling author and industry expert.
  • OptionTradingpedia.com
    Their mission is to provide the most authoritative options trading information and education for free and to unite option traders globally.
  • The Option Yield Report
    They scan 50000+ covered calls and covered put options to provide a guide for writing covered calls and covered put options. Choose a report — compare covered calls, covered puts, or both together in one report.
  • TFC Commodity Charts & Quotes
    Free source of daily commodity futures and financial market information. They track many commodities and financial indicators, making the information available in the form of free commodity charts and intraday commodity quotes. You may also create your own personalized charts menu to gain quick access to the charts in which you are most interested.
  • U.S. Futures & Options
    International Investment Portal & Research Center. Quotes, Charts, News, Analyses, Commentaries, and Links.
  • USGS: Minerals Yearbook
    U.S. Geological Survey. The Minerals Yearbook is an annual publication that reviews the mineral and material industries of the United States and foreign countries. The Yearbook contains statistical data on materials and minerals and includes information on economic and technical trends and development. The Minerals Yearbook includes chapters on approximately 90 commodities and over 175 countries.

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