Options are powerful because they can enhance an individual’s portfolio. They do this through added income, protection, and even leverage. Depending on the situation, there is usually an option scenario appropriate for an investor’s goal. A popular example would be using options as an effective hedge against a declining stock market to limit downside losses. Options can also be used to generate recurring income. Additionally, they are often used for speculative purposes such as wagering on the direction of a stock.
Options on futures began trading in 1983. Today, puts and calls on agricultural, metal, and financial (foreign currency, interest-rate and stock index) futures are traded by open outcry in designated pits. These options pits are usually located near those where the underlying futures trade. Many of the features that apply to stock options apply to futures options.
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Options belong to the larger group of securities known as derivatives. A derivative's price is dependent on or derived from the price of something else. As an example, wine is a derivative of grapes ketchup is a derivative of tomatoes, and a stock option is a derivative of a stock. Options are derivatives of financial securities—their value depends on the price of some other asset. Examples of derivatives include calls, puts, futures, forwards, swaps, and mortgage-backed securities, among others.
A commodity market is a market that trades in primary economic sector rather manufactured products. Soft commodities are agriculture products such as Wheat, coffee, sugar and cocoa. Hard commodities are mined products such as gold and oil. Future contracts are the oldest way of investing in commodities. Futures are secured by physical assets. Commodity market can includes physical trading in derivatives using spot prices, forwards, futures and options on futures. Collectively all these are called Derivatives.
For example: A trader in October 2016 agrees to deliver 10 tons of steel for INR 30,000 per ton in January 2017 which is currently trading at INR 29,000 per ton. In this case, trade is assured because he got a buyer at an acceptable price and a buyer because knowing the cost of steel in advance reduces uncertainty in planning. In this case, if the actual price in January 2017 is INR 35,000 per ton, the buyer would be benefitted by INR 5,000 (INR 35000-INR 30,000). On the other hand, if the price of steel becomes INR 26,000 per ton then the trader would be benefitted by INR 4,000 (INR 30,000- INR 26000)
When purchasing put options, you are expecting the price of the underlying security to go down over time (so, you're bearish on the stock). For example, if you are purchasing a put option on the S&P 500 index with a current value of $2,100 per share, you are being bearish about the stock market and are assuming the S&P 500 will decline in value over a given period of time (maybe to sit at $1,700). In this case, because you purchased the put option when the index was at $2,100 per share (assuming the strike price was at or in the money), you would be able to sell the option at that same price (not the new, lower price). This would equal a nice "cha-ching" for you as an investor.
The fee you are paying to buy the call option is called the premium (it's essentially the cost of buying the contract which will allow you to eventually buy the stock or security). In this sense, the premium of the call option is sort of like a down-payment like you would place on a house or car. When purchasing a call option, you agree with the seller on a strike price and are given the option to buy the security at a predetermined price (which doesn't change until the contract expires).