Futures and Options

A futures contract is an agreement which binds one person to purchase a set amount of a commodity or financial product, such as corn, oil or stocks, at a specified point in the future. The other person agrees to sell the product for the specified price when the time comes. The agreement takes place in a futures market, where many buyers and sellers compete to secure the best deal.

An option contract gives the purchaser the right to buy or sell short 100 shares of the underlying security. The underlying security can either be a stock or an ETF. There are two types of options: puts and calls. The call gives the right to the owner to purchase shares while the put gives the right to the owner to sell shares short. The contract can be exercised at any time before the expiration date. An option contract is usually quoted by the exercise price and the date of the expiration. Option contracts expire on the third Friday of the expiration month. It only makes sense to exercise the option contract if the price of the underlying security is higher than the exercise price on a call option or lower than the exercise price on a put option.

The biggest difference between futures and options is that an option gives the owner the right to buy or sell short while a futures contract is an obligation for the transaction. For example, if you own a call, you have the choice of exercising it before the expiration date. However, if you bought a futures contract, you have an obligation to purchase the underlying product at the price specified on the date specified.

"Triple Witching" is an event that occurs when the contracts for stock index futures, stock index options, and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December. The final trading hour for that Friday is the hour known as triple witching. The markets are quite volatile in this final hour, as traders quickly offset their option/futures orders before the closing bell.

Monday of OEX week is often flat, true direction is revealed on tuesday.

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