more futures, options, and shortings?

Question

i asked a question about futures, options, and shorting earlier, and i just want some clarification.

with an option, you can buy or sell the stock, but if u dont you loose the money you payed when you signed the contract. With a future, you have to buy/sell the asset at a certain point, and loose/gain money depending on which direction the stock market went. Correct? but can u buy a future on an option, or is that the same thing as shorting? and can u buy an option on a future? or is that shorting also?

Answer 1

You have alot of it correct, but not 100!. An option is just that, you have an option to exercise the terms of the contract. In order to get that option, you have to pay for the contract. So a call option lets to buys some asset (stock for instance) at a set price within a certain time frame. A put option, lets you sell something at a set price within a certain time frame. Remember that you can also sell (also called write) an option, where you are obligated to deliver on the option. In the case of a call, you have to provide the stock if the buyer exercises his rights, while a writer of a put option is obligated to buy the stock. In return, you get the premium that is paid by the buyer. Writing options are fairly complicated, so make sure you know what you are doing before trying this. There is in theory unlimited loss potential when you write options, but only limited loss potential when you buy an option.

Futures are actual contracts for an asset. So in theory you must take deliver or provide the asset upon expiration. In practice, most options are settled before delivery with money that settles up the contract. For certain futures contracts, particularly financial, everything is settled up and there is no possibility for delivery. Again, this is very complicated, with a lot of leverage, and the potential to lose or make alot of money, so make sure you know what you are doing.

Lastly, there are options on futures, but no futures on options.

Answer 2

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With a call option you have the right (but not the obligation) to buy a certain amount of the stock (usually 100 shares per contract) for a fixed amount of time at a fixed price. With a put option you have the right (but not the obligation) to sell a certain amount of the stock (usually 100 shares per contract) for a fixed amount of time at a fixed price. When you buy an option you pay a premium for that option, which is the most you can lose regardless of any change in the stock price.

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If you still own the future at expiration, that is correct. However, you could also sell the future prior to expiration.

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No, there are no futures on options.

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Yes. There are options on futures.

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No, that is not shorting.

Shorting is selling something that you do not own. So if you buy anything you are not shorting. If you sell a stock you do not own you are shorting. If you sell an option you do not own you are shorting, also called "writing" in the options world. If you sell a future you do not own you are shorting.

If you want a good introduction to options I suggest you go to the CBOE learning center at

http://www.cboe.com/LearnCenter/default.aspx

and go through as many of the tutorials and classes as you want. They are free.

Answer 3

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