Can someone explain what are futures, options and swaps?
In: Economics
A future is sorta like preordering something and hoping it’s worth more by the time you get it.
Like an oil future is preordering 100 barrels of oil and hoping the price goes up by the date on the contract. If oil is $50 a barrel when you buy then is suddenly $100 a barrel you double your money.
Options are contracts that give you the “option” to buy or sell a stock at a specific price(the strike) before a specific date (expiration date)
So an option would be like let’s say tesla is $400 a share now. And you buy an option that expires next week with a strike price of $410. You can at any time pay $410 for the stock as long as it’s before the week is over. So if tesla goes to $600 a share the next day you can use your option to buy the shares for $410.
Options are done in blocks of 100 shares. And the thing there makes options unique is the contract itself has value because it might go up or down. So that $410 option for tesla could cost you hundreds of dollars just to hold the contract, you can also sell the contract.
Usually options contracts can go up or down much faster than the stock itself so it’s a good way to use less money to get more but it is more risky. The contract value after expiration is $0. So let’s say you have that $410 option and tesla is $409 and it expires. The option contract your bought is worthless. So those hundreds of dollars is gone.
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