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THE BASICS on Futures & Options

THE BASICS on Futures & Options. Kansas City Board of Trade. What are futures and options?. A contract to make or take delivery of a product in the future, at a price set in the present

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THE BASICS on Futures & Options

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  1. THE BASICS on Futures & Options Kansas City Board of Trade

  2. What are futures and options? • A contract to make or take delivery of a product in the future, at a price set in the present • In formalized futures and options trading on exchanges, standardized agreements specify price, quantity, and month of delivery • Started in agriculture, but have expanded to a wide range of products

  3. Example • If you agree in April with your Aunt Sue that you will buy two pounds of tomatoes from her garden for $5, to be delivered to you in July, you just entered into a futures contract!

  4. Why do futures and options markets exist? • Risk Transfer • Price Discovery

  5. How does trading futures and options work? • Similar to stocks, gains and losses are the result of price changes

  6. How does trading futures and options work? • Futures can be highly leveraged • Options risks differ depending on position

  7. How does trading futures and options work? • A number of factors to consider including account type, trading style • Traded through a registered broker

  8. K.C. Isgreat: A simplified, hypothetical trading example • Do your homework • Choose a broker • Enter into an agreement • Make your first trade

  9. K.C. Isgreat: A simplified, hypothetical trading example • The first trade….

  10. K.C. Isgreat: A simplified, hypothetical trading example • Futures • Transaction • Sell futures 950.00 • Buy back futures 939.00 • Total Return 11.00 11.00 x $100=$1,100 • Sell futures 950.00 • Buy back futures 959.00 • Total Return -9.00 9.00 X $100 = -$900

  11. THE BASICS on Futures & Options Ideas for portions of this presentation came from “Understanding Opportunities and Risks in Futures Trading,” a publication of the National Futures Association. To order that publication or other NFA materials, please call the NFA’s Information Center toll-free at 1-800-621-3570. This presentation is in no way intended to provide a complete futures education. Sources for additional information include the NFA, the exchanges where various products are traded, and your broker or advisor. Value Lineis a registered mark of Value Line, Inc., a New York corporation that provides financial services and publications. Since 1982, the Kansas City Board of Trade has been licensed to use the Value Line mark in connection with its efforts to establish futures markets tied to the Value Line index. The Kansas City Board of Trade and Value Line, Inc. are not affiliated corporate entities.

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