Accurately what is the Options contracts Market and why would anyone want to operate it?
Wikipedia’s response is: A Futures Market is a financial exchange where people can trade Options contracts Contracts. Well, what is a Futures Contract? A Futures Contract is a legally binding agreement to buy specified quantities of commodities or financial devices at a particular price with delivery set at a specified time in the near future. IOTA Market Capitalizations
That is important to highlight the word Contract. The first important difference between the Futures Market and, say, the Stock Industry is usually that the Futures Market trading contracts, not shares of stock. You are not buying and selling a share (or piece) of a company. A Options contracts Contract is an arrangement between investors to operate a specific quantity of a commodity or financial instrument, for example, gallons of gas or lots of wheat.
It really is reasonably simple to see how commodities work. An aircarrier, for instance, agrees to get 100, 000 gallons of fuel for planes at the current selling price, but does not take delivery until sometime in the future.
That was why Southwest Airlines made money when the cost of energy was $140/barrel and other airlines had none. That they had negotiated Futures Agreements with several oil companies years earlier when the price tag on oil was less expensive, and waited for delivery until 2007-2008. When the price of oil is cheap again, they shall be buying Futures Agreements for delivery in 2011-2012.
That’s all well and good, you say, but that isn’t really by using a trading system with trading strategies, that negotiating.
Intended for every Futures Contract, we have a degree of risk. Futures and options Contracts leverage risk against the value of the underlying asset.
Southwest attained risk. In case the price of crude fell below the price they paid, they paid more than they had to. Simultaneously, they reduced risk because they thought that the price of oil would endeavor higher than their agreement price. In their circumstance, the leverage was profitable.
Now consider the oil companies. They reduced risk, assuming crude oil prices would fall below the deal price they negotiated with Southwest. They acquired risk because the price of oil rose higher than the contract (thereby burning off additional earnings they could have earned). In this case, their leverage was not as good as it may have been.
Here is to stop and say, I’m not Southwest Airline carriers. I’m an individual day trader. I don’t want to buy 100, 500 gallons of crude. How to trade Futures?
The Chi town Mercantile Exchange (CME), in which the majority of Futures agreements are traded, realized that individual investors want to trade Futures just like major institutions; individual investors want to leverage their risk as well. They will also understand that small investors will not associated risk millions of dollars on gallons of gas agreements or tons of whole wheat. Consequently, the CME made a decision to create an investment environment that would draw in individual investors to transact Futures.
Remember, as small investor, you have tons of exchanges available to you for your trading day. You can commit in large cap stocks and options on the NYSE, technology stocks with the NASDAQ, ETFs – AMEX, and options at the CBOT. To entice investors to trade Futures, the CME created an exchange that made other exchanges lighter in comparison.
To start with, the CME created emini Options contracts designed specifically for specific investors. The e in emini means that they are traded electronically. Likely to have a trading system right on your computer’s desktop where your trades go to the CME. The mini means that the contract is a smaller version of the exact same contract that the bigger institutions trade.