Stock Futures vs. Stock Options

We examine three critical warning signs and conclude that the next downturn could be different from the crisis. Skip to main content. Full access to Barchart. He does not have a right. Similarly, livestock producers often purchase futures to cover their feed costs, so that they can plan on a fixed cost for feed. Right-click on the chart to open the Interactive Chart menu. Initial margin is set by the exchange.

Coverage of premarket trading, including futures information for the S&P , Nasdaq Composite and Dow Jones Industrial Average.

Calculators

There were no trades for this contract during the time period chosen. Please choose another time period or contract. Reference Rate BRR -. Reference Rates Last Updated: Trade Date CME Globex CME ClearPort Open Outcry Open Interest 14 Sep 13 Sep 12 Sep 11 Sep 10 Sep 07 Sep 06 Sep 05 Sep 04 Sep 31 Aug 30 Aug 29 Aug 28 Aug 27 Aug 24 Aug 23 Aug 22 Aug 21 Aug 20 Aug 17 Aug Last Updated 14 Sep Those who purchase call or put options receive the right to buy or sell a stock at a specific strike price.

However, they are not obligated to exercise the option at the time the contract expires. Investors only exercise contracts when they are in the money.

If the option is out of the money , the contract buyer is under no obligation to purchase the stock. Purchasers of futures contracts are obligated to buy the underlying stock from the seller of that contract upon expiration no matter what the price is of the underlying asset.

Still, it is very rare for stock futures to be held to their expiration date. Stock options provide investors with both the right to buy a stock but not the obligation and the right to sell the same stock but not the obligation through calls and puts, respectively. But stock options also provide investors with a breadth of flexible strategies unavailable through futures trading.

Each strategy offers different profit potentials for investors and speculators. A trader, of course, can set it above that, if he does not want to be subject to margin calls. Performance bond margin The amount of money deposited by both a buyer and seller of a futures contract or an options seller to ensure performance of the term of the contract. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather it is a security deposit.

Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract:. Expiry or Expiration in the U. For many equity index and Interest rate future contracts as well as for most equity options , this happens on the third Friday of certain trading months.

This is an exciting time for arbitrage desks, which try to make quick profits during the short period perhaps 30 minutes during which the underlying cash price and the futures price sometimes struggle to converge. At this moment the futures and the underlying assets are extremely liquid and any disparity between an index and an underlying asset is quickly traded by arbitrageurs. At this moment also, the increase in volume is caused by traders rolling over positions to the next contract or, in the case of equity index futures, purchasing underlying components of those indexes to hedge against current index positions.

On the expiry date, a European equity arbitrage trading desk in London or Frankfurt will see positions expire in as many as eight major markets almost every half an hour. When the deliverable asset exists in plentiful supply, or may be freely created, then the price of a futures contract is determined via arbitrage arguments. This is typical for stock index futures , treasury bond futures , and futures on physical commodities when they are in supply e.

However, when the deliverable commodity is not in plentiful supply or when it does not yet exist — for example on crops before the harvest or on Eurodollar Futures or Federal funds rate futures in which the supposed underlying instrument is to be created upon the delivery date — the futures price cannot be fixed by arbitrage. In this scenario there is only one force setting the price, which is simple supply and demand for the asset in the future, as expressed by supply and demand for the futures contract.

Arbitrage arguments " rational pricing " apply when the deliverable asset exists in plentiful supply, or may be freely created. Here, the forward price represents the expected future value of the underlying discounted at the risk free rate —as any deviation from the theoretical price will afford investors a riskless profit opportunity and should be arbitraged away. We define the forward price to be the strike K such that the contract has 0 value at the present time.

Assuming interest rates are constant the forward price of the futures is equal to the forward price of the forward contract with the same strike and maturity.

It is also the same if the underlying asset is uncorrelated with interest rates. Otherwise the difference between the forward price on the futures futures price and forward price on the asset, is proportional to the covariance between the underlying asset price and interest rates. For example, a futures on a zero coupon bond will have a futures price lower than the forward price. This is called the futures "convexity correction.

This relationship may be modified for storage costs, dividends, dividend yields, and convenience yields. In a perfect market the relationship between futures and spot prices depends only on the above variables; in practice there are various market imperfections transaction costs, differential borrowing and lending rates, restrictions on short selling that prevent complete arbitrage.

Thus, the futures price in fact varies within arbitrage boundaries around the theoretical price. When the deliverable commodity is not in plentiful supply or when it does not yet exist rational pricing cannot be applied, as the arbitrage mechanism is not applicable.

Here the price of the futures is determined by today's supply and demand for the underlying asset in the future. In a deep and liquid market, supply and demand would be expected to balance out at a price which represents an unbiased expectation of the future price of the actual asset and so be given by the simple relationship.

By contrast, in a shallow and illiquid market, or in a market in which large quantities of the deliverable asset have been deliberately withheld from market participants an illegal action known as cornering the market , the market clearing price for the futures may still represent the balance between supply and demand but the relationship between this price and the expected future price of the asset can break down.

The expectation based relationship will also hold in a no-arbitrage setting when we take expectations with respect to the risk-neutral probability. With this pricing rule, a speculator is expected to break even when the futures market fairly prices the deliverable commodity. The situation where the price of a commodity for future delivery is higher than the spot price , or where a far future delivery price is higher than a nearer future delivery, is known as contango.

The reverse, where the price of a commodity for future delivery is lower than the spot price, or where a far future delivery price is lower than a nearer future delivery, is known as backwardation. There are many different kinds of futures contracts, reflecting the many different kinds of "tradable" assets about which the contract may be based such as commodities, securities such as single-stock futures , currencies or intangibles such as interest rates and indexes.

For information on futures markets in specific underlying commodity markets , follow the links. For a list of tradable commodities futures contracts, see List of traded commodities.

See also the futures exchange article. Trading on commodities began in Japan in the 18th century with the trading of rice and silk, and similarly in Holland with tulip bulbs. Trading in the US began in the mid 19th century, when central grain markets were established and a marketplace was created for farmers to bring their commodities and sell them either for immediate delivery also called spot or cash market or for forward delivery.

These forward contracts were private contracts between buyers and sellers and became the forerunner to today's exchange-traded futures contracts. Although contract trading began with traditional commodities such as grains, meat and livestock, exchange trading has expanded to include metals, energy, currency and currency indexes, equities and equity indexes, government interest rates and private interest rates.

Contracts on financial instruments were introduced in the s by the Chicago Mercantile Exchange CME and these instruments became hugely successful and quickly overtook commodities futures in terms of trading volume and global accessibility to the markets.

This innovation led to the introduction of many new futures exchanges worldwide, such as the London International Financial Futures Exchange in now Euronext. Today, there are more than 90 futures and futures options exchanges worldwide trading to include:. Most futures contracts codes are five characters. The first two characters identify the contract type, the third character identifies the month and the last two characters identify the year.

Futures traders are traditionally placed in one of two groups: In other words, the investor is seeking exposure to the asset in a long futures or the opposite effect via a short futures contract. Hedgers typically include producers and consumers of a commodity or the owner of an asset or assets subject to certain influences such as an interest rate. For example, in traditional commodity markets , farmers often sell futures contracts for the crops and livestock they produce to guarantee a certain price, making it easier for them to plan.

Similarly, livestock producers often purchase futures to cover their feed costs, so that they can plan on a fixed cost for feed.

In modern financial markets, "producers" of interest rate swaps or equity derivative products will use financial futures or equity index futures to reduce or remove the risk on the swap. Those that buy or sell commodity futures need to be careful.

If a company buys contracts hedging against price increases, but in fact the market price of the commodity is substantially lower at time of delivery, they could find themselves disastrously non-competitive for example see: Speculators typically fall into three categories: With many investors pouring into the futures markets in recent years controversy has risen about whether speculators are responsible for increased volatility in commodities like oil, and experts are divided on the matter.

This gains the portfolio exposure to the index which is consistent with the fund or account investment objective without having to buy an appropriate proportion of each of the individual stocks just yet. When it is economically feasible an efficient amount of shares of every individual position within the fund or account can be purchased , the portfolio manager can close the contract and make purchases of each individual stock. The social utility of futures markets is considered to be mainly in the transfer of risk , and increased liquidity between traders with different risk and time preferences , from a hedger to a speculator, for example.

In many cases, options are traded on futures, sometimes called simply "futures options". A put is the option to sell a futures contract, and a call is the option to buy a futures contract. For both, the option strike price is the specified futures price at which the future is traded if the option is exercised. Futures are often used since they are delta one instruments.

Calls and options on futures may be priced similarly to those on traded assets by using an extension of the Black-Scholes formula , namely the Black—Scholes model for futures. For options on futures, where the premium is not due until unwound, the positions are commonly referred to as a fution , as they act like options, however, they settle like futures.

BREAKING DOWN 'Futures'

Stock options provide investors with both the right to buy a stock (but not the obligation) and the right to sell the same stock (but not the obligation) through calls and puts, respectively. But stock options also provide investors with a breadth of flexible strategies unavailable through futures trading. Futures and options are tools used by investors when trading in the stock market. As financial contracts between the buyer and the seller of an asset, they offer the potential to earn huge profits. As financial contracts between the buyer and the seller of an asset, they offer the potential to earn huge profits. Pre-Market Data, Stock Market Quotes, Fair Value, Futures, Europe & Asia-Pacific Markets, Volatility Index, World Markets Information.