Futures & options
Locking in a future deal
Futures are contracts to buy or sell an asset at a specific
price on a specific date in the future.
Options are contracts that give the buyer the option to buy or
sell a particular asset at a specific price anytime before a
specific future date.
Futures are contracts to buy or sell a particular asset (or cash
equivalent) on a specified future date. For example, a company may
use a futures contract to lock in the price of a foreign currency
it needs to buy at some future date. Futures are also widely used
for speculative trading. They may be bought and sold on the
Australian Securities Exchange (ASX).
The futures contract is legally binding, no matter what the
market value of the asset is when the contract matures. Both
the buyer and the seller of a futures contract face potentially
high losses if the market is not performing in their favour.
To find out more about futures, try the ASX's futures online course.
An option is a contract between two parties. The buyer has the
right, but not the obligation, to buy (or sell) an asset, at a set
price, on or before a specified future date.
The seller of an option keeps the money paid for the option
whether or not the buyer exercises their rights. If you buy an
option but don't exercise your right to buy or sell the asset by
the due date, it expires and becomes worthless.
Options can be bought or sold at any time. The market price of
an option will reflect the current value of the asset and the time
left before the option expires.
Selling an option can be very risky especially if you don't
already own the underlying asset. If the market price rises above
the 'exercise' price you may be forced to buy at the market price
and immediately sell at the lower 'exercise' price, incurring an
Try the ASX's options course if you want to
find out more.
options are a type of option where you try to predict the
short-term movements of a share price, currency, index or
commodity. Unlike other options the holder does not have the right
to buy or sell the underlying asset. They are relatively new
in Australia and are a speculative, high risk product.
Futures and options are complex products. Even experienced
investors will struggle to understand the risks involved in trading
them. We recommend you do not invest in these products unless
you have a written statement
of advice from an independent, licensed financial planner
stating that the product is suitable for you.
Seek financial advice if you need further
information and assistance about futures and options.
Last updated: 22 Jan 2016