For many investors, trading in futures and options is considered to be a high risk investment, while others perceive futures and options to be protection against dramatic price changes that take place on a daily basis in the stock market.
Futures and options can be complex because they are derivative, or hybrid investments. In stead of representing ownership, like stocks or the promise of a loan repayment, with bonds. Futures and options are once or twice removed from a real product. A futures contract with a crude oil company, is a bet as to which way the oil prices are going to be moving. what happens to the actual product itself is of little concern to this type of investor.
For some investors, trading in futures and options are a way of reducing their investment risk. For instance farmers that agree to sell their grain at a good price are protected if the price of grain should drop. investors that sell options on stock that they own can offset their losses if the market should collapse. However the majority of investors that dabble in futures and options, do so because the possibility of sustaining a huge loss is balanced by the opportunity of an enormous gain. Individual investors playing in this area of the market are usually small players, because the stakes are high and the returns are unpredictable.
Although futures and options contracts are deals that are made for the future, the future that they are talking about when they make the contract isn’t very far away. Take for instance futures contracts that are made on grains and other food sources usually will expire with-in a year of the contract being made, but investors can find contracts on certain financial futures that will last at least five years.
Most options contracts will expire with-in five months or less, although a few options have been known to last as long as seven months. Although there is an exception to this rule that is known as LEAP options, these are long-term options that can last up to thirty months.