Please explain options and futures in simple terms and also derivatives?

Question

Options and Futures from the derivative markets are really complex terms can anyone explain in simple terms explain Options and futures?

Also the terms like call option and put option with suitable examples...

Answer 1

While it's impossible to explain everything about options and futures in a short paragraph in simple terms, I'll give you some key points.

Derivatives are financial instruments that derive their value from some other instrument such as a stock, bond, currency or commodity. Options and futures are derivatives.

A futures contract is a contract to buy/sell the underlying instrument (stock, bond, currency, commodity) at a certain date in the future at the price agreed today. For example, if you buy a December oil futures contract today at $112 then when the contract expires in December you will buy that barrel of oil at $112. If you sell a futures contract then you will sell that barrel of oil at $112. There are quite a few more details, but I'm simplifying it. In the case of a futures contract both a buyer and a seller have an obligation to take delivery/deliver the underlying instrument.

An options contract is similar to a futures contract, but an option gives the buyer the right to buy (a call option) or sell (a put option) the underlying instrument at or before the specified date at the set price, known as the exercise price or strike price. Note that the buyer has the right, but not the obligation to exercise the option. In return for this right, the buyer pays the seller a certain amount of money, called a premium.

For more details use Google and Wikipedia.