Options, futures, and securities are financial instruments used by investors or organizations for investment programs. An investment program is budgeted or planned costs for wealth investments arranged in a hierarchical structure solely dependent on the objectives of the individual or organization. Options are contracts giving the holder of the contract rights but not obligation to buy and sell the underlying asset at a specified strike price before that price or date, depending on the type of option (Saliba et al., 2009). Futures are assets with a predetermined future date and price obligating the seller to sell or the buyer to buy an asset at the predetermined price and time. Securities are certificates or financial instruments with monetary value and can be traded. Securities comprise equity securities such as stock and debt securities such as debentures and bonds. The underlying asset in futures can be a stock, while futures contracts can be based on protection. Options, futures, and securities are vital financial instruments in an investment program.
Understanding how the financial instruments work gives a better explanation of how they influence investment portfolio. Option securities delve into stocks. A call option allows the holder to buy securities at a stated price within a stated timeframe. A put option allows the seller to sell the securities at a stated price within a stated time frame. The price at which the security is bought or sold at the expiry of the time frame is called the strike price. Both the seller and buyers do not have an obligation to buy or sell the underlying securities. The value of an option depends entirely massively on the price of the underlying asset. Option security prices are influenced by their intrinsic value, which drives the option prices, profit potential from puts and calls, and trading strategies. A put option buyer stands to make money when the stock price falls below the strike price before options time expiry. A call option buyer makes money when the share price goes over the strike price before the option's expiry. Futures work like options, but the difference is that the holder should buy or sell by the end of the expiry period. Option and futures security are great tools for hedging to reduce the risk of investment programs. However, futures are more effective due to the volatility of trade in stock futures.
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The use of options and futures markets instruments to speculate and reduce investment risks is based on the principles of hedging and speculation in such markets. Hedging is taking the opposite position from how the market reacts in the future (Sercu, 2011). For instance, an airline organization foresees a fuel price rise in the future. Their response is to into agreement with the fuel organization to buy fuel at a lower price at a speculated time. When their speculation comes to fruition, the fuel organization is obligated to sell them the fuel at the given price. The exercise is known as hedging and has helped the airline industry avert the risk of high fuel costs eating into their profits. The airline organization does not make a profit from the situation but prevents itself from the chance of making losses. Hedging is ideal when an organization causes one effect to cancel the other. Therefore, organizations can hedge their investment programs by shorting futures securities contracts on the market and buying put options securities against the long positions in the portfolio. Speculation is trading in financial instruments on an educated guess about the direction of the market (Coyle, 2001). For instance, if a speculating organization believes a stock is overpriced, they offload the stocks when the price is still high, and when the prices drop, the organization has the option to take up more stoke. The objective of speculation is to make a profit. In the situation where an organization hedges by shorting futures and buying put options, a speculator may look to short an exchange-traded fund and futures market securities to make a potential profit on a downside move.
The holder of the shares becomes the writer. They benefit from a call option by being short. As the buyer of a call option bets that the price of the share will rise above the strike price, the writer bets that the price will remain the same or under the strike price. The writer makes money by betting that the price will not rise. The writer can still advance their strategy by buying a call option using the $10,000 and combining the long approach with a short one, which entails writing the same number of calls with a higher strike price. The objective is to profit from the trading range between the call strike prices. The strategy is called a bull call spread (Saliba et al., 2009). As the holder of options stocks, the second strategy involves writing a put option, which means that the price of the stock will not go below the strike price. To further the plan, the writer can purchase more put options at a premium to the current strike price (with a lower strike price). The difference in range will earn the writer more money. The strategy is known as a straddle.
Futures and options are both contracts that offer the buyer a right to purchase or sell the contract at a future date. However, in options, the buyer or seller is not obligated to buy or sell at the end of the expiry period. As options are based on an underlying security, futures are based on the asset itself. Options are meat for anyone in the market, but futures are designed for institutional buyers because they have the intention of buying a commodity an use it or sell to a different party. Both futures and options are risky financial instruments for influencing investment programs.
Futures options remain principal financial instruments when an organization or individual uses the tools in managing their investment programs.
References
Coyle, B. (2001). Currency options . Routledge.
Saliba, A. J., Corona, J. C., & Johnson, K. E. (2009). Option spread strategies: trading up, down, and sideways markets . Bloomberg Press.
Sercu, P. (2011). International Finance: Theory into Practice. Princeton University Press.
