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Future & Options :-
The difference between a commodity, a futures contract and an options
contract is illustrated in the following three paragraphs, which will take
you a minute and a half to read.
Suppose you’re in the market for an oriental rug. You find the rug of your
choice at a local shop, you pay the shopkeeper $500, and he transfers the
rug to you. You have just traded a commodity.
Suppose instead you wish to own the rug, but you prefer to purchase it in
one week’s time. You may be on your way to the airport, or maybe you
need the short-term use of your money. You and the shopkeeper agree,
verbally or in writing, to exchange the same rug for $500 one week from
now. You have just traded a futures contract.
Alternatively, you may like the rug on offer, but you may want to shop
around before making a final decision. You ask the shopkeeper if he will
hold the rug in reserve for you for one week. He replies that your proposal
will deny him the opportunity of selling the rug, and as compensation,
he asks that you pay him $10. You and the shopkeeper agree, verbally or
in writing, that for a fee of $10 he will hold the rug for you for one week,
and that at any time during the week you may purchase the same rug for a
cost of $500, excluding the $10 cost of your agreement. You, on the other
hand, are under no obligation to buy the rug. You have just traded an
options contract.