Hello, everybody,
It happened so one day, that I became a professional trader in
derivatives (futures and options in particular) and was... for 4 years
of my life :) untill the 1998 world crisis.
>I am under the impression that an option contract grants a
>person the right but not the obligation to purchase whatever
>is specified in the contract, be it stocks or commodities.
You almost right, but you forgot the *price*, "call" option gives you an
opportunity to buy underlying at a "strike" price of option for
"premium" paid to seller of the option when "it is bought". However
there is a "put" option that gives you an opportunity to SELL underlying
at a strike price if you paid the premium to seller of the option when
you bought is. There is a "execution date" as well, you can do whatever
is granted to you by option *by* this date (american option) or *on*
this date (european option).
In fact, you buy option and can do nothing untill the expiration date or
you come with the "strike price" in you hand and get the "underlying" -
good or property or right.
>When you purchase a futures contract, you are -obligated- to
>make good on the terms of the contract. If you buy a future
>for oil, you can expect the amount of oil specified in the
>contract to be delivered to your doorstep (in
>barrels) at the time/price specified in the contract unless
>you sell the contract to someone else, either before it's too
>late or for a profit.
Again, you are *almost* right. You are obliged to: pay (or get) on the
end of each trading day the difference between the price at which the
contract was "bought" and the "close" price of the future (that is
always traded on very liquid market- futures exchange). If you bought
the future at $10 and close price of the next day is $11 - you get $1,
if the price falls to $9 - you PAY $1. Same "clearing" is performed
every day, this is called a "variation margin". After the last trading
day of futures contract the last clearing is made, after that you (if
you are a buyer) *must* pay the close price - the price at which the
tenders in this futures contract were closed on the last trading day.
Exchange *has to* show you the counterparty to the contract, according
to which the underlying *will* be delivered to you.
You can not "do nothing" if you have a futures "position". In fact you
can go broke even if the price at which you bought futures was THE SAME
as it will be on delivery date (as it was with Nick Lisson and Barings)
because the price can move in unfavorable direction to your position
between these dates and you will be unable to pay margin.
Yours, Sincerely Alexander V. Fedotov
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