Options allow you to buy or sell a stock at a given price on or before a given date. You pay for that right, and the options can be traded and sold just like stock is. However, they can be extremely volatile and make or lose a lot of money fast. If you can't afford to lose, you have no business trading options.
I trade some, and often lose. This morning I made $6250 profit before before breakfast selling some options. The person who bought them lost $4500 in the next hour. They move that fast, and thus are extremely dangerous for the novice, and especially for a novice that can't afford to lose.
You need to go find this from a reliable source. For instance nearly everything In Donald's post is incorrect.
Both allow you to buy something in the future at a price you agree on today.
Futures applies to commodities (corn, oil, gold) while options apply to stocks. (Also can apply, similarly, to real estate.)
One attraction of both is that you only have to put up a small fraction of the total price today.
Here's a real simple example: Let's say GrainX is selling for $3 a bushel today. You think the price is going up. Now, you could buy 1,000 bushels today for a total of $3,000. But you don't want to spend $3,000 today. Instead, you could buy "futures" of GrainX. You could spend, let's say, $100, today for the right to buy 1,000 bushels at $3 a bushel two months from now.
Note: Option and future prices vary depending on both the length of the deal and the price you can buy at.
Anyhow: Let's say in two months, a bushel of GrainX costs $3.50. You could exercise your option--pay $3 per bushel--and buy your 1,000 bushels. You'd save 50 cents per bushel.
Or: The value of the futures contract or option will go up if the price of GrainX goes up. And you can sell your option to someone else. In the example above, the savings (or profit) by buying at $3.00 versus $3.50 is $0.50 per bushel, or $500 total. Your option will go up by just about that amount. So you can sell your option and make $500 without ever having to buy or sell a bushel of GrainX.
Real estate options work the same way. You might see a house that you can't buy today. But maybe it's worth $200,000 today. You give the owner an option to buy the house for, maybe, $210,000, in two years. You give the owner $1,000 for that right, for the option to buy for $210,000. In two years, the house is worth $250,000. You could go ahead and in two years buy the house for $210,000 and get a nice bargain. Or you could sell the option to someone else who wants the home. You might sell the option for $30,000. The buyer would then have the right to buy the home for the $210,000 you'd negotiated. The buyer would have spent $240,000 total ($30,000 to you and $210,000 to the home's seller). So the buyer gets a bargain: a $250,000 house for $240,000. The owner gets what he wanted: $210,000. And you get $30,000 on a $1,000 investment.
Note: Options give you the RIGHT to buy the item (GrainX, a house, etc.). It doesn't REQUIRE you to buy. In the case of the house, if the value hadn't gone above $210,000, you'd let the option expire. You'd lose $1,000. And the owner would have to look around for someone else to buy the home.
Hope that helps.
please explain in simple words. I would really appreciate some tips and advices on futures and options as I have no knowledge about it, I mean how to trade in a way to gain profits.
