What are futures and options?

Answer 1

Futures are contracts that allows you to buy certain commodities at a certain price by a certain date. Unless closed out, futures contracts are binding and the buyer of the contract must be able to buy the commodities binded by the contract.

Options are contracts that gives you the RIGHTS but not the OBLIGATION to buy certain stocks or commodoties at a certain price by a certain date. The main difference is, you can choose to ultimately buy the underlying asset or not, its not binding on the buyer.

Answer 2

Slightly different variations on the same basic theme. Futures are usually seen in commodities trading. They are contracts in which on a date certain in the future, one person will buy a certain amount of something for a certain price. An example of how they work well: I am the grain buyer for Kellogg's and I bought a futures contract for 1 million bushels of wheat for October 2008 at $6.50 per bushel. When this contract matures I write a check for $6.5 million and a million bushels of wheat finds its way into my grain elevators. The cereal made from this wheat will start appearing on store shelves in December or January. If I didn't have this contract, I'd have to buy wheat on the spot market--which would be great if it dropped to $5 per bushel but would be a catastrophe if it rose to $8. Similarly, the seller likes this because they know how much they're going to be paid. An example of how these are bad: I'm an Individual Investor and I take out a futures contract on 5000 bushels of corn. I think the price of it is going to go up, and when it does I can sell it to a manufacturer and make some money. Unfortunately for this investor, commodities go down in price. A LOT. Options are the same thing, but you don't have to buy the underlying asset. If you bought an option to sell 100 shares of GE for $35 per share because you think it's going to $30 in the near future, and GE goes to $40, you just let the option expire.