Options and futures are types of financial contract. The second name is derivatives or derivative financial instruments (PFIs). How are they different from other securities and is it worth working with them for novice investors?
The buyer of derivatives does not acquire assets in pure form: bonds, fuel, grain or gold, but only the right to buy or sell them in the future at a fixed cost. In other words, it is insurance against the unpredictable price movement of the asset.
What is the difference between an option and a futures one?
The holder of the option may not use the right to buy or sell and not conduct a transaction until the end of the contract agreement. Conducting a transaction for the holder of the asset is not necessary, if the direction of the price movement is unfavorable for him, he can lose only the money spent during the purchase.
However, the seller of the option must fulfill the terms of the contract on the first request, if this was the case before the end of the contract. This is its main difference with the futures: at the time of the final settlement, the seller and the buyer are obliged to comply with all the terms of the contract for the clauses of the contract.
The benefits and harms of derivatives
The derivatives exchange allows the depositor to manage the portfolio with great effect. PFIs could not be more suitable for compensating for risks, and they were developed directly for this purpose. The margin mandatory in the contract makes it possible to increase the income from the transaction at times with a profitable turn of events.
An important advantage of derivatives is the ability to deposit only a certain amount from the main payment, which allows you to pay less than for any other valuable documents.
Derivative instruments give high chances for earning in the market. In the circle of financiers, derivatives are also called "a financial means of universal defeat."
For what reason, with all the pluses, are reviews of such assets so negative? In reality, futures, options and similar financial contracts, if used illiterately, can lead to large losses.
An example is the case of Amaranth Advisors LLC. In 2006, this investment company, in pursuit of earning on the spread, concluded too many contracts on gas futures, but the liquidity of the asset fell sharply. Losses amounted to $5 billion.
Thus, with sufficient knowledge, experience, the ability to control your portfolio and clearly set goals, derivatives may well bring profit and protect against risks.