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Indices DJIA S&P 500 DAX 30 Nasdaq 100 Nasdaq Comp Nikkei 225 FTSE 100 SMI DJ Stoxx 50 CAC 40 Hang Seng Kospi Nyse Comp AMEX   -     -     -     -     -     -     -     -     -     -     -     -     -     -   10911 1137.4 5732.4 2127.7 2438.1 8981.9 5072.1 4984.1 2161.9 5732.4 19614.7 1817.4 7017.6 2174.7 Commodites Light Crude Oil Brent Crude Copper Gold Pallad Platinum Silver Dow Diamonds QQQQ   -     -     -     -     -     -     -     -     -   83.08 106.28 1.17 1758.7 730.5 1782 38.21 109.16 55.42 Last update: 11-08-2011 14:29:00 (GMT - Live) Futures or Options? Option, Call Option, Put Option, Option Buyer, Option Seller, Puts and Calls In-the-money, At-the-money, Out-of-the-money Delta The option strike price Time Value Decay Strategy A: Buying calls to take advantage of a rising stock market Strategy B:Buying put options to profit from declining live cattle prices Strategy C: Straddles Using Options on CME E-mini S&P 500 futures Basic Option Strategies: Initiating a Market Position Long Futures (1 Long April Live Cattle Futures) Short Futures (1 Short September Euro FX Futures) Synthetic Long Futures (Split Strike) Long Butterfly Long Straddle Ratio Call Spread Call Ratio Backspread Box or Conversion / Reversal Futures or Options? While futures offer price protection by allowing the holder of a futures contract to lock in a price level, a major appeal of options is that the holder of an options contract is afforded price protection, but still has the ability to participate in favorable market moves. Because the buyer of an options contract has the options contract but not the obligation to perform, he incurs no expenses beyond the initial premium. Therefore, if the market moves against a position, and a trader holds on to this option, the maximum cost is the price he has already paid for the option. On the other hand, if the market moves in favor of a position, the virtually unlimited profit potential to the buyer of an options contract is parallel to a futures position, net of the premium paid for the options contract. Therefore, protection from unfavorable market moves is achieved at a known cost, without giving up the ability to participate in favorable market moves. Futures vs. Options Futures Options Risk Unlimited risk on long and short positions Defined and limited on purchase of puts and calls; unlimited on sale Price Protection Establishes fixed price Establishes floor or ceiling price protection Margin Required on long or short positions Futures style margins for sellers, margin contained in the cost of premium for buyers Hedging Long, short, spread Multiple hedging strategies For example, an oil refiner buying crude oil is exposed to the risk of rising crude prices, and benefits when raw material prices decline. The less costly the crude, the lower the manufacturing costs will be. In order to protect against crude oil cost increases, the refiner can either buy a crude oil futures contract or buy a crude oil call options contract. Assume that the crude market is trading at $27 a barrel, but the refiner fears that prices may increase for his crude oil requirements in the next quarter. He could buy $27 calls for each of the three months involved for 70¢ a barrel, or $700 per contract (each contract is for 1,000 barrels), plus transaction costs. If the price climbs to $30 per barrel, the refiner has earned $3,000 per contract ($3 per barrel on 1,000 barrels), less the $700 premium he paid for the call, for a net gain of $2,300. This gain would offset $2.30 of the $3-a-barrel increase in his cash crude costs. What if crude oil prices fall? Because the holder of an options contract has a right and not an obligation, if price of crude oil falls to $25 per barrel, the refiner would let the options contract expire and buy his cash crude oil requirements at the lower, more favorable market price. For comparison, assume that the refiner hedges his position only with futures. He buys crude oil futures at $27 and the market rises to $30. In that case, his profit on the futures position (excluding transaction costs) would be $3,000 or $3 per barrel, which would fully offset the increase in his cash crude costs. However, if the price falls to $25 per barrel, the refiner would have locked in his cost at $27 per barrel and forfeited the lower, more favorable market price. The futures-only position gives him a stable oil acquisition cost – $27 – no matter which way prices move, at the cost of forfeiting the ability to participate in a decline in his raw material prices. Likewise, a jewelry manufacturer who uses gold is exposed to the risk of rising metals prices, and benefits when gold prices decline. In order to protect against cost increases, the manufacturer can either buy a gold futures contract or buy a gold call options contract. Assume that gold is trading at $265 an ounce, but the manufacturer fears that prices may increase for his requirements over the next six months. He could buy $265 call options for the six months for a premium of $4.00 an ounce, or $400 per contract (each contract is for 100 troy ounces), plus transaction costs. If the price climbs to $285 per ounce, the jewelry company has earned $2,000 per contract ($20 per ounce on 100 ounces), less the $400 it paid for the call options contract, for a net gain of $1,600. This gain would offset $16.00 per ounce of the $20 increase in his cash costs. Suppose gold prices then fall. Because the holder of an options contract has a right and not an obligation, if the price of gold falls to $250 per ounce, the jewelry company would let the options contract expire and purchase its cash gold requirements at the lower, more favorable market price. Assume that the jewelry manufacturer hedges his position only with futures. He buys gold futures at $265 and the market rises to $285. In that case, his profit on the futures position (excluding transaction costs) would be $2,000 or $20 per ounce, which would fully offset the increase in his cash costs. However, if the price falls to $250 per ounce, the jewelry manufacturer would have locked in his cost at $265 per ounce, and forfeited the lower, more favorable market price. The futures-only position gives him a stable gold acquisition cost – $265 – no matter which way prices move, at the cost of forfeiting the ability to participate in a decline in his raw material prices. While the loss that can be incurred on an options contract is limited to the premium, the loss that can be incurred on a futures contract is the opportunity cost resulting from locking in a price and forfeiting the benefits of favorable market moves. Although options and futures are by necessity closely related, they are not interchangeable. Each has advantages and disadvantages and can be used separately or in combination to achieve a variety of risk management and investment objectives. source: